I do not plan to provide a lot of commentary on this blog as 1000s already do this already (and some actually do it well!). Yet, I believe it is appropriate of a site that includes buy ranges to also discuss sell rules. William O’Neil advocates a strict 7-8% stop loss rule from the point of purchase, for all purchases. Though I think this is a good foundation, I also think this rule is for the average trader in an average market buying an average growth stock.
I am a little more flexible given the circumstance, based on my own risk tolerance, the general market, and the behavior of the specific stock (and its proximity to its moving averages). Take for example INVN which is known to experience greater than 8% swings intraday. I believe that it would be illogical to apply the 7-8% stop loss to this stock. Note that the volume on March 7, 2012 and bounce from its 50-day moving average made this an easy purchase with a stop loss under the January 26, 2012 low. When a stock that is not as volatile as INVN has clear support via price or its 50-day moving average (when purchased above the 50-day), that is less than 8%, I will consider placing the stop loss under this point even if it’s only say 3% from the purchase price.
When a stock rises from your buy point, O’Neil states to take gains at 20-25% (with the exception of holding stocks 8 weeks that perform the above with 3 weeks) and to never permit a large gain turn into a loss. Again, I think this rule is for the average trader in an average market with an average growth stock. What if a stock never hits 20%? This was the case much of last year, when the astute trader would have adjusted selling to the 10-15% range. Much weight should be given to the volume vs. average volume, both of the general market and the stock. If the market and/or the stock falls in rising volume routinely then selling should be considered, no matter what the % gain or loss. Note in this current trend that many stocks from previous quality risk reward setups , such as AAPL, BWLD, HLF, LULU, MA, PCLN, RAX, SWI, have performed exceptionally well and selling using the general rules would have seen lost potential. In these conditions I choose to hold tight and have a plan in place when selling picks up in increased volume, which inevitably it will. For such large gainers, a trader who wants peace of mind could gradually raise stops, such as in SWI an average purchase price around 34 could now have a stop just below the 50-day at around 35 which will give SWI room to fluctuate.