Ask Colin

Would you sell a stock if its uptrend became significantly overstretched?

It all depends.

Firstly, I have rules for taking profits on the way up. This helps to lock them in, but more importantly, it helps to let me stay in the trend and resist the urge to snatch profits and run too early.

However, there is overstretched and overstretched. If the price is looking very high in PE ratio terms (eg some of the 70 to 90 times earnings we saw in the boom), and the price had just gone up vertically, I might take profits, not so much on the move up, but on any hesitation in that move. Short term trend lines and Parabolic are useful for this tactic. I would probably not take off all of the position though.

Nevertheless, in general terms, the aim of the game is to let your profits run. That is why I always leave some of the position on if the trend is still intact. I have seen stocks go up say 40% and then scream up 60%. Then they fall back, but the trend stays intact. Over the next couple of years it goes up 10 times what I paid for it. If I had sold on the 40% to 60% move I would be crying tears of blood. And hitting myself over the head for breaking my rules. They are the stocks I am trying to catch. Get one of them each year and you are laughing.

Notice I said something about rules just now. That is the key. You asked what I would do. I answered you in terms of my plan. However, what I do may not be possible for someone else for a whole lot of reasons, mainly psychological or to do with the stage of development they are in as a trader or investor.

In fact, what I have done is almost the exact opposite of what Dr Elder would do. His plan is to catch the sharp move up. He would sell part at his upper envelope line and more/the rest as the trend hesitates in the short-term (individual bars). If you want to study his methods, buy Come into my Trading Room locally or from www.elder.com.

Keyword: