Stock Picking 5: Selling

Before I discuss selling stocks, let’s do a recap of the Stock Picking posts up until now.

Part 1: Looking for Stocks

Here, I introduce my stock searching process for Canadian and US stocks. I feel more confident in stocks that have higher trading volume. I look for major Canadian stocks under $20 that trade over 10,000 shares a day. For US stocks, they must be over $5 and average at least 500,000 shares a day.

Part 2: Determine Your Investment Goals

I talk about the different reasons you might want to buy stocks. There are different stocks for different investment objectives better suited by shorter or longer-term time horizons. Whether the time horizon is short, medium, or long, I like to get in early before a stock’s price really starts to take off. To determine this, I look at a stock’s price history chart. For shorter-term trades, I seek additional information by looking at the charts of a stock’s corresponding sector and the market.

Part 3: Factoring in the Sectors and the Stock Market

I generally look for stocks in a sector that has been quiet for a while and is just starting to warm up. I’m not as concerned if a sector has been lagging the market, as long as it’s not going down the tubes, especially if the market isn’t. If I’m interested in several stocks in a sector that is starting to heat up, then I’ll pick the stocks that meet my criteria in volume, price, and charts.

No Stock Picking Here. Just Buy the Market Through ETFs

Stock picking is not for everyone as it’s hard to outperform the market. It’s a matter of strategy, research, and some luck. You can simplify the whole process if you ‘buy the market’ by buying the market index ETF. What’s great is that you can also get extra money from an ETF’s distributions or dividends. You can buy ETFs for the Canadian, US, or international markets, or even sector ETFs. You can have a whole portfolio of just ETFs to meet a variety of investment objectives!

Part 4: Investment Income

Here, I discuss my interest in stocks that pay dividends and how I invest in the blue chippy stocks for my retirement fund. What a great source of income as you can also enjoy a profit if you sell your shares later on at a higher price! For these income-generating stocks, I’m less concerned about their sectors.


Part 5: Selling Your Shares

Objective: To determine when to sell some or all of your stock.

Why Sell Your Shares?

Here are a few reasons to:

  • Bank profits
  • Rebalance your portfolio because you’re aging and you need to reduce your riskier assets
  • You need the money to spend or to invest in other things
  • Tax-loss selling (a capital loss can be subtracted from other capital gains, thus further reducing taxation on profits)
  • Play defense because there’s been an interest rate hike or a recession, so you want to lower your exposure and risk
  • Your stock stops paying a dividend
  • Your stock’s company or sector is in trouble and this is affecting the share price
  • Your stock is an underperforming dud
Banking Profits for Retirement

My retirement fund will consist mostly of investment income-producing assets. I’m optimistic to a fault. This means I sit back thinking that most of the dividend-paying stocks for my retirement fund will be worth a lot more in share price too. When I’m a spry elderly lady, livin’ large, and planning my next world adventure, I’ll sell some of those shares and use the massive profits to pay for my trip. If the markets reach exaggerated highs, I might sell some shares to buy a decent annuity.

Banking Profits for My Swing Trades

For my swing trades, I try to give a stock time as it moves within the profit zone, which is anywhere significantly higher than what I paid in share price. I look at the price charts to try to determine how far they’ll go before they experience a major selloff.

It’s a lot more realistic to expect a cheaper stock to double, triple, or increase multiple times in value. Once my investment has more than doubled in value, I usually sell half to 2/3rds of the shares and keep the rest of my shares in for the longer term. This way, I get back my principal investment and I can reinvest it along with the profits in another stock. If the remaining shares don’t keep going up in share price, I’ll sell them for a smaller profit — or break even at worst.

I’ve mentioned before that I like my Canadian stocks cheaper because my Canadian trading account is less funded. I also like them cheaper because I can buy more shares. I find that in general, Canadian stocks don’t move as quickly in price. I can still make money, even with smaller price moves, since I have a lot of shares. For my US swing trades, I use fewer shares than I do for Canadian stocks because they’re more expensive.

US stocks are good for swing trades mainly because they usually can move a lot more in price in a shorter amount of time than Canadian stocks. In other words, they get a lot of price action. I look for stocks that move on average at least $1 in share price in a day. The downside is, when stocks move faster, you have to act faster. If you’re not paying attention, it might get right into the profit zone and then sell off more quickly than it took to get there.

For more expensive stocks, it will take much longer for your total investment to double in its full value. This can take years. Sometimes you’ll have a jackpot situation where there’s a buyout; however, you can’t just wait and hope for these rare events to happen. So what swing traders do is decide how much of their investment they’re willing to risk losing (not all) and see if they stand to gain at least twice, three times or more that amount.

What…?

A lot of traders talk about ‘stops’ to minimize losses. A stop is basically your uncle point where you decide it’s better to take a calculated loss at a certain price than to lose more than that. Once a stop is determined, a trader will calculate how much he or she expects to gain and whether it’s realistic given the stock’s chart, its sector, the market, etc.


I’ll break down here how stops and setting targets work

lulu

  • Let’s say you bought 100 shares of a stock trading at $59.00 per share. Your investment is $5900. But there’s no way you want to lose an entire $5900 if things go south. And how long will it take for the stock to double in price to $118 a share? 
  • You might determine through analysis of its price history and other data that you will not accept a loss lower than $54 per share. You don’t want to lose more than $5 per share, which is $500. So of your $5900 investment, you’re only risking $500 of it. 
  • For this trade to be worth it, you want to at least get double the money you’re risking. Some traders want more, some are okay with less, it’s a personal thing for each person.
  • Take the $5 risk and to get double the reward would mean a $10 price increase at $69.00 ($1000 profit). Triple reward is a $15 increase at $74.00 ($1500 profit). All because you were willing to risk $500 of your investment.

This is a trade I actually took this week. It had a good earnings report (are see-through yoga pants back in style?) and it jumped close to the triple reward zone. It was good enough for me, so I sold 80% of my shares at $71.90.

For my remaining 20%, I’ll hang on to see if it’ll keep going up. Each time it surpasses another risk-reward multiple ($74, $79, $84, $89), I’ll move the stop up on that. If it breaches any of those multiples, I’ll sell the rest.


I use a very loose form of the stop method as I found it to be a pain to bother with stops. I found that with most of these trades if I’d waited a bit longer, I wouldn’t have taken a loss–instead, I would’ve ended up with a huge gain. I found that once I started to set more loosey goosey expectations as to what I’m willing to lose and what I expect to gain, my trading account started to flourish. Yes, I am a loosey goosey swing trader.

I find that if the stock is of a good company in a strong sector, even if you had to endure the discomfort of underperformance, the only thing you really lose is time. Because once the stock really starts to rock, it was totally worth the wait.

This is why sectors are important. If the sector is strong and your stock is strong or stronger than the sector, then you reduce the chance of sitting painfully through negative numbers. If, however, your stock is much weaker than its sector and is going down while the sector is going up, then there could be something else going on with the company that you might have to look into.

Having said all this, I’m not saying to ignore your threshold for losses. You must figure out what works best for you and trade responsibly out of respect for your money. For me, a good swing trade is more than just price action. It’s a combination of factors such as the company, its sector, and the market. Since I consider multiple reasons, I’m okay with waiting out the unforeseen downturns and I don’t totally wig out if the price gets a little out of whack.

Thanks to a diverse portfolio, I only ever have a small fraction of underperformers while the others do well. Sometimes these turn a corner and become the top performers in my portfolio.


Swing Trading is NOT for Everybody

Why do I swing trade? I don’t live much of a structured life (although I sometimes crave one) nor do I have dependents. I have a higher risk tolerance so I can endure the dry spells and downturns and patiently wait for the profits. I’m quite happy to aggressively grow my account in the mid-term while my more solid stocks grow for the long-term. It’s exciting, interesting, engaging, and I can go on about the fun I get out of being tapped into the markets.

Making money like this isn’t for everybody. I’m only sharing my strategies so that curious readers will have a better idea of what I do with my own money. All of what I write is only for information sharing purposes.

While there is a risk component to any kind of investing, there are many ways to reduce that risk with good diversification. To do this effectively, it’s good to be knowledgeable, even of the investment basics. Most working people, in my opinion, are better off saving regularly for their goals and investing their extra savings with a part of it in conservative stocks and ETFs that pay a dividend. No doubt, a lot of money can be made this way!

Stock Picking – Part 2: Determine Your Investment Goals

Part 2: Determine Your Investment Goals

Objective: Identify your investment objectives first, and then let them guide you when you’re choosing a stock.


The main objective for investing in anything is to make money. With stocks, you make money two ways by selling your shares at a higher price than you paid and from dividend payments. Additionally, your decision to invest in a stock could be supported by a number of other reasons. Such reasons will guide you in the selection process.

Here are some reasons to buy a stock:

  • To fund your retirement 
  • For faster portfolio growth
  • To generate dividend income
  • You see potential growth in a particular sector, so you want a good stock from that sector
  • The economy is looking to slow down, so you want to invest in a defensive stock
  • The economy has been in a slump for a while but now business activity is starting to pick up, so you want to buy stocks to get in on the action
  • You like a company for its products, services, or growth potential, so you want to be a shareholder.

My investment objectives vary as I want to invest for the long-term (a fun and comfy retirement life) and the short-term (concerts, trips, and buying a couple of properties in Canada and somewhere hot).

For my retirement portfolio, it’s all about the long game and I’m looking to invest in something that will do me well for years, even decades. So, I look for stocks that have ‘blue chip’ qualities: they pay dividends, they’re well-known, well-established and have been around for a long time, and they usually offer more than one type of product or service which allows them to adapt to various consumer demands and trends. It’s also a bonus when the stocks are in defensive sectors such as utilities and consumer staples. I don’t do much analysis here, I apply a very basic, rudimentary logic.

There is no guarantee these stocks won’t suffer when the economy is slow, but the idea is that even during tough times, they’ll do better or suffer less, and they’ll still likely pay you dividends. If their stock prices take a hit, I’ll likely buy more shares when they start to recover because they’ll be cheaper.

For my swing trades, I look for stocks that look like they’ll do well over the next few months to a year. I look for typically strong stocks that have been quiet for a while and haven’t seen much trading action. When this happens, it’s usually because their sectors have also been quiet. If all the stocks in a particular sector have been down for a while, I’ll narrow down my selection based on the stock price and volume. (See Stock Picking – Part 1.)

The selection process for my swing trades is more involved as I use a very basic form of technical analysis of a stock’s price history to help me decide on where I’m going to buy and where I’m likely going to sell. Technical analysis is about analyzing the price history of a stock in relation to its trading volume, sector, and market environment. 

Many people dispute the validity of technical analysis and prefer to examine the fundamentals of a company’s value in relation to its share price instead. They’re all valid to some degree and many financial pros analyze both the technical and fundamental information.

I prefer to analyze charts because I’d rather see if I’m paying much more than others who got in earlier than me. The lower the price I pay for a stock, the more confident I am in the trade. It’s not a guarantee that the price won’t go lower, but even if it does, I will suffer less by getting in at a lower price than if I bought a stock after it became hot and expensive. I never buy a stock after it makes the news because it’s usually too expensive by then.

chart-1d

Above is a very basic chart of a stock that I actually own. I consider a stock to be ‘quiet’ if it’s trading sideways (the first horizontal line). Think of a stock’s price in terms of flying in an airplane; trading sideways is like starting on the runway. I try to buy either when it’s still on the runway or just as it’s taking off (no higher than where the airplane is). So I just have a quick glance at a stock’s chart to determine if it’s just taken off or if it’s gone far beyond the clouds. If it has long taken off already, I’ll just wait for another sideways setup. Sometimes this wait time could take months to years and I’ll just keep checking the charts every now and then.

For years, I’ve been using freestockcharts.com to look up charts for Canadian and U.S. stocks. It’s FREE and the features and tools for the charts are very similar to what you would use if you had a pro trading account with a brokerage. To look up a stock, you just type the company name and you can select it from the list of options it provides. Sometimes a company will trade on both the Canadian and US stock exchanges, so be sure you’re selecting the proper exchange for you. There are many short and informative tutorials available on its site and on YouTube.

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I look at the charts for everything I buy for both long-term buys and shorter-term swing trades as my goal is always to buy shares at lower prices. For the long-term trades, it’s more important that the stocks meet some ‘blue chip’ criteria. For the swing trades, I rely more on technical analysis, the sectors, and the markets.

Next time, I’ll get into how I analyze sectors and markets!

 

 

Stock Picking – Part 1: Looking for Stocks

You can decide to buy a stock using very basic logic. It can be as simple as, “My bank is great. I’m going to buy its stock.” And there you go, you own a dividend-paying stock. Those who want to build a more diversified stock portfolio seek more information and try to pick stocks using some strategy.

My process for picking stocks is quite simple and involves less information than what is required by trained financial professionals. I don’t manage other people’s money, only my own, so I’m less stressed out about aligning a certain number of factors before buying or selling a stock. My strategy is quite loose in form, but I feel that being rigid will lead to over-analyzing and worry. I’d rather be relaxed and let my trades work when they do because if I panic or get too excited, I’ll sell them too soon.

With stocks, I operate on different time frames. I sometimes day trade, and I always close the position within a day or less. My main thing has become swing trading, which means I’ll hold a position anywhere from over a day to a few weeks or even a few months. And then I’ll do real investing where I’m looking to hold a solid dividend-paying stock until I retire.

I don’t recommend that anyone day trades, it’s a far too risky way to handle your hard-earned money and it’s not investing at all. It’s gambling. Many might argue that swing trading isn’t investing either, but it depends on how you look at it. I see it as shorter term investing. Your level of involvement can vary from being very active by watching stocks and the markets, and managing your trades all the time, or you can be more hands-off and just be willing to do such things occasionally. I’m very hands-off with my swing trades. Most of what I’m going to be talking about is related to how I pick stocks for swing trading.

I need to declare that when it comes to managing my money, I have a higher risk threshold than the average person. Over the years, I’ve enjoyed big wins and suffered abysmal losses. My confidence comes from years of experience, training, research, lessons, trade analysis, and self-examination. I’m finally in a place where I’m quite happy with my stocks and current strategy. I’m also happy accepting that if the markets change, I might have to adapt my strategy.

What I’m revealing here today is just to share my method among the curious, not to teach it or to say this is what you should do to make money. My only hope is that you’ll pick up some good ideas and know how to apply whatever is useful to your own decisions.

Just remember that there is no fail-proof way to invest, nor is there one way to make money from investing. Investing is just one aspect of personal finance, which is how you manage your money and make financial decisions. I feel that the other aspects related to personal finance — working, budgeting, managing debt, and saving — are just as important, if not more.

I’m going to break down my explanation into parts. Each part will be blogged separately over the next few weeks.


Part 1: Looking for Stocks

Objective: To find major stocks that have higher trading volume


Canadian Stocks: 

I look for stocks that trade a lot in the TSX. I narrow the search process down by looking at the larger stocks in the TSX that are listed in the S&P/TSX 60 Index or the S&P/TSX Composite Index. If you click on those links, you can see the index’s stocks under ‘Constituents.’ If you don’t know what an index is, it means you haven’t read my book yet! You can still refer to the Terminology page for quick reference.

I like stocks that have the higher daily trading volume which means the number of shares bought and sold in a day. So with TSX stocks, I’d like them to trade at least 10K shares a day; the more the stock trades, the more interested I am in it. My TFSA is less funded than my other trading account, so I tend to look for Canadian stocks that are under $20, preferably under $10 so that I can buy more shares.

Rarely do I buy stocks that trade on the TSX Venture Exchange, but if it’s for stocks in a relatively new industry (like cannabis), then I’ll buy the from the venture if it meets all my requirements.

US Stocks:

I use the amazing Screener feature on finviz.com to find US stocks. For free, you can customize different search requirements and save those settings. I’ve created different “presets” for finding current financial stocks, tech stocks, oil stocks, pharma, transports, etc., that suit my preferences. 

The one common feature I use in all my searches is “Average Volume,” so I usually prefer US stocks that trade over 500K shares a day. Some people look for stocks that trade much more, some are okay with less than 500K. If I have too big a list, I’ll also add “Current Volume” to the search criteria and I’ll select over 1M shares because it means it’s currently trading a lot more than its average volume and something unusual could be going on with those stocks.  

I usually look for US stocks that are over $5 in share price, mainly because the higher-priced stocks often, but not always, move more in price so I can make a decent profit in a shorter amount of time. I have more money available in my US trading account too, so I’m able to shoot for higher-priced stocks.

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So that’s basically how I find stocks. I try to select from more popular, higher-volume stocks from the major stock exchanges and I narrow down my selection using preferable price criteria. 

Next time I’ll discuss my process for narrowing down my choices. Stay tuned!