When To Sell A Stock: Is It Time To Cut Your Losses?

Andrew Reyes
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Buying a stock takes a fair amount of courage and conviction, even if you expect that it will be a short-term hold. During volatile market conditions, an equity or option purchase can turn sour surprisingly quickly. People may think of selling at a loss as a fear-driven behavior, but stepping away from stock while you are in the red also takes courage.

So many of the most regrettable mistakes that traders and investors make with selling are largely psychological. Knowing when to sell a stock at a loss is one of the most challenging and complex mental disciplines that investors need to cultivate.

Being wary of common trading psychology pitfalls and sticking to a game plan helps you approach your analyses pragmatically and discerningly.

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Table of Contents

Selling Basics

You don’t want to hold onto a poorly performing stock because of mere hope or outright obstinance. Even if you’re bag-holding with conviction, you have to consider new variables and conditions as they develop. Ultimately, you need to temper your emotions so you can make the right choices about when to sell stocks at a loss.

Here are some of the most important fundamentals of selling that you need to apply consistently to your investment strategy.

Use Stop Losses

Working with a stop loss prevents you from overextending yourself and taking a much greater loss than you reasonably assumed that you were risking. Identify a fixed amount or percentage that you are willing to take a loss on.

Cut your losses when a share price triggers your stop loss. There is no bright-line rule about where you should put your stop loss. A conservative stop loss is around seven percent, but investors with a higher risk tolerance may be willing to hold out until a stock loses ten percent of its value. 

Your target exit point should be a factor in your stop loss analysis. Savvy investors and traders put most of their capital into play in which they perceive the approximate value of their potential gains to be at least two and preferably three times greater than their probable potential losses.

When traders are down the full percentage amount that they had hoped to earn on equity, they are probably well past their stop loss. If you hope to earn fifteen percent, you should probably put your stop at around seven or eight percent.

Reasons to Sell a Stock

Technical factors aren’t correct one hundred percent of the time, but you need to give fundamentals the attention that they deserve. Interpreting basic candle chart patterns and traditional catalysts that almost always make share prices drop can equip you to make informed decisions about when to sell stocks at a loss.

Bearish Patterns 

A chart that shows an uptrend is over and a downtrend has underway merited a reevaluation of your position. You may need to adjust your target exit point and how long you’ll need to hold your investment to reach a revised target. When you’re examining chart patterns and deciding when to sell a stock, it’s important to consider overall market conditions.

A big green day may not necessarily portend an imminent reversal if the entire market advanced, and a big red candle doesn’t mean imminent doom if most stocks declined.

Moving averages are a useful metric for deciding to cut your losses. When twenty and fifty-day moving averages drop far below stocks’ 200-day moving averages, you may not see recovery for some time.

Short Interest

When financial institutions with a lot of buying power have taken a strong short position on equity and the outstanding options activity is predominantly bearish, a downturn can appear likely. Being on the lookout for a sudden increase in short interest or a total short interest volume greater than sixty percent is a red flag that you may need to consider selling.

Short-sellers use algorithms to their advantage more than equity holders who take a long position. Enhanced algorithmic activity in virtually every order book on major exchanges is making it easier for institutions and options traders to push the scale in their favor.

Until the SEC acknowledges and acts to stop machines from making trades, this type of price action is sure to continue exacerbating volatile conditions and widening risk exposure for private investors in 2022 and beyond.

Earnings Concerns

If a company will be announcing earnings within a month, it is wise to review how it has recently performed on earnings. If you see that earnings reports historically precede a big gap down, it’s safe to assume that a stock will fall on earnings news and you should cut your losses early.

Overreactions to earnings have been increasingly prevalent amid today’s volatile market conditions. Even an earnings beat from companies with massive market caps can precipitate a double-digit drop within minutes of an announcement. If you’re debating when to sell a stock and you’re stressing out about earnings drama, consider selling or reducing your position.

Pursue Better Prospects

Your interest in other prospects can add to your uncertainty about when to sell stocks at a loss. Furthermore, keeping your buying power tied up in a ticker that is not performing could prevent you from seizing other opportunities that are more promising.

When a downward trend seems indefinite, opportunity costs on top of the risk of further losses on your principal make your bags feel a little heavier. Selling stock to pursue something that you perceive to be a better performer can give you a chance to earn back what you have lost without having to average down or test the limits of your comfort level with waiting.

Reasons Not to Sell

Stop losses are your friend, but there are also some reasons why you may not want to act too robotically about reining in risk and selling a plunging position. Some beaten-down stocks are well worth hanging onto.

Ask yourself if you see a stock’s current share price as a good entry price if you weren’t already holding it. If the answer is yes, then it may be practical to hold tight or average down.

Averaging Down May Be the Best Play

In order to average down smartly, you have to be very cautious. Ideally, you should leave room to cost-average your position when you first take it. Going as far as you can with a stock in one buy limits your ability to maneuver and tweak your average later on. You also need substantial reasons beyond gut instinct to average dowd past a stop loss.

Avoid Panic Selling Mistakes

Buy and hold investors have to be patient about when to sell a stock while the market is in turmoil. In general, it is not advisable to sell on a day when all of the major indices are experiencing market selloffs. Likewise, a rough day for an entire sector is a crummy day to time a sale.

When a lousy jobs report or hype about a Fed announcement causes major indices to plunge in unison, hold off on panic selling.

Upcoming Catalysts

Research what’s going on with holdings that have been losing value. One good PR release can make a flailing ticker a high flier. A new product line or winning a big government contract, for example, can attract buyers. Biopharma and Medtech companies can surge after publishing clinical trial results or getting FDA clearance.

If a stock has a relatively low float, that type of spike in demand can push a share price back to your average in short order.

Some catalysts might impact an entire sector. Cyclical trends can cause order volume to return to specific commodities. Likewise, drops in fuel prices can have a positive effect on airlines and logistics companies. With these types of catalysts, there’s some degree of truth to the old trope that you should “buy the rumor and sell the news.”

Be Aware of Tax Fees and the Wash-Sale Rule

Selling at a loss because you perceive you can buy a stock back cheaper may be a good course of action. However, you have to weigh the tax implications. Repurchasing the same equity within thirty days could preclude claiming the loss on your current year’s deductions. When you cut your losses, they’ll make up part of the cost basis for what you buy back.


Lastly, it is important to recognize that losing gracefully is hard. Watching something take off right after you lost your patience or stopped out can feel even worse than the loss did. When this happens, you have to make a conscientious decision to be cool. Do not get exasperated and keep watching it incessantly.

Above all, do not try to chase it because you feel like you are missing out on something you should have earned.

The more you focus your energy on selling mistakes and losses, the more likely you will be to continue repeating them either consciously or subconsciously. It is important to learn from mistakes, but not agonize over them. Try to view losses as lessons that can help you determine when to sell a stock going forward.

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