Simple sell rules to protect against disaster in financial markets

Simple sell rules to protect against disaster in financial markets
Photo by Maxim Hopman / Unsplash

In my past blog posts, I reveal some of my stock picks. It is meant to track my own progress and get a better feel of the market, not meant for others to follow. I am not a qualified financial advisor. My worry is that some readers may blindly follow the stock picks and end up losing a lot of money because they sold poorly.  

I do not wish to do anyone any harm (See my URL domain name. Do No Evil is part of the domain name).  So, I feel obligated to write some simple sell rules that I follow myself. The purpose of these sell rules is to protect against disastrous losses, not maximize profits. You may want to use them as guidelines for protection.

  1. When the price closes below the 50-day moving average initially, re-examine reasons for buying. If the reasons are still as strong as when you bought the stock, you may want to continue to hold. If the price continues to fall further when it is already below the 50-day moving average, sell the position partially even if the reasons are still strong.

    I don't argue with Mr Market. Years of experience being slapped by Mr Market has instilled in me a strong respect for Mr Market.

    If the price continues to fall further even after the position has been sold partially, consider selling more until it reaches your emotional comfort level. If you are emotionally comfortable with the falling price, hold. No right or wrong here. What is important is to reduce some risk exposure when losses mount.
  2. When the price close below the 200-day moving average initially, sell the position partially. Don't argue with Mr Market. Respect Mr Market.
    If the price continues to fall further when it is already below the 200-day moving average, sell the position completely. Respect Mr Market.

It is entirely possible the price may bounce back strongly after selling below the key moving averages. It is also possible that the stock may drop to a disastrous new low if you do not sell. Even a blue-chip stock with impressive growth numbers can disappoint. See what happened to Ali Baba (9988.HK) this year 2021. If you had sold Ali Baba when it first fell below 200-day moving average, you would have gotten out at around HKD228. Today, Ali Baba closing price is HKD121.20 which is close to 47% below HKD228. Nobody knows which stock will be the next Ali Baba. By following these rules, one can avoid financial disaster.

Alibaba weekly chart (Jun2020 - Dec2021)

These rules are written to protect my readers who are not yet experienced in financial markets to know how to react in bear markets. The honest truth is that these rules work against you quite often, especially in a bull market. However, if you follow them all the time, you will be protected against financial disaster. Financial markets are dangerous. Please heed these rules if you are new to markets. I do not wish to cause harm to anyone.

I follow these rules with discipline myself. During the exceptional times when I do not, my position size is small enough such that even when I lose 100% on the position, I will do fine.

If you have your own investment style, these simple rules may not suit you. I'm aware there are people who go against the tide, buy on the dip and make good money from it. Your choice.

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