Knowing when to sell a stock is as (if not more) important as picking the best stocks to buy.
There are 3 reasons to sell:
1) to cut a loss;
2) to book a gain;
3) to free up capital.
Buying right takes care of most selling decisions down the road. By buying right I mean buying the strongest breakouts under the most favorable market conditions as close to the pivot as possible.
Now, the selling part.
Selling to Cut a Loss
Many CANSLIM investors cut their losses at 7 or 8% - "no questions asked." But they should be.
CANSLIM insists on cutting losses at 7 or 8% because a stock in a strong breakout rarely undercuts the pivot by more than 7 or 8%. The key here is buying exactly at the pivot. With so many CANSLIM followers watching the same stocks, the pivot becomes the bottleneck with too many orders waiting to be executed at the same price. The result - the stock zooms past the pivot on relatively few trades. Your chances of getting it at exactly the right price are SLIM (no pun intended). Should you pass up on the breakout altogether if the stock is more than 5% above pivot (as CANSLIM insists)? Absolutely not! But you should modify your loss cutting strategy.
If you buy 5% above pivot and enter your stop 7% below purchase price - that's 2% below pivot, where your stop is likely to be executed in a reaction. Remember, the stock rarely goes 7 or 8% below pivot, not your purchase price. So if you bought 5% above pivot, your stop should be 12 or 13% below purchase price.
One way to make up for a larger percentage loss is to adjust position size to keep the dollar loss constant. If your rule is to cut losses at 7% and your position size per trade is $10,000, you are prepared to lose $700. If your purchase price is 5% above pivot, reduce position size to $6,000 to keep your maximum loss at around $700. If it sounds like a huge reduction - don't worry, you can add to your position when the stock completes the first reaction without undercutting your stop loss.
Selling to Book a Gain
Once the stock has completed the pullback and makes a new high, move the original stop to just below the pullback. Repeat the process as necessary.
The steeper the ascending trendline, the more likely it is to be violated at some point before the advance is complete. For that reason you may start laddering your stops as the stock advances, keeping one tight stop at the top but leaving some at lower levels. This way you will lock in some profit as soon as the stock starts losing steam but keep some in case it has another leg up.
There is a big difference between selling to book a profit and being stopped out. Your stops are there to protect you against company specific risks or a general market disaster. But they are not the right place to sell to lock in profit. Many high-flyers top out more or less at the same time - when the market begins to deteriorate. There is no reason to wait for the stops to be triggered in a deteriorating market - cancel the stops and sell at market. Well, keep some if you think you may be wrong.
Example
Let's go to a daily chart for YGE to illustrate.
YGE offered two buying opportunities: on September 9 and September 18. Setting the stop on September 9 would have been trickier. Since the stock crossed over the 50 DMA on that day, a trip back below the line would have been bearish, so a stop just below $15.81 (the low for the day) would have been reasonable. The stop on September 18 would have been at $18.76 (8% below pivot). In both instances the stock never looked back. If you bought on the 9th, you could have moved your stop to just below $17.10 (the low on September 7) once YGE made a new high out of that consolidation on September 11.
On September 21 you move your stop(s) to just below $20.70 (the low on September 20) but since it's a minor consolidation you may want to give YGE more room by leaving some stock at the previous stop. On October 2 you move the stop to just below $25.11 (the low on September 27).
Your last major stop would have been just below $28.96 (the low on October 22), and you would have been stopped out on November 12 for a total return of 40-70% in a little bit over two months, depending on your purchase dates and prices.
But you did not have to wait for November 12 to be stopped out. The market flashed a major sell signal on October 19. You could have sold YGE on that day or days or even weeks later for an even bigger gain. (The market was selling off partly due to rising oil prices. Since solar stocks go up with oil, you could have justified keeping YGE a little longer.) For "just such an occasion" you may want to keep some stock "naked" (not protected by stops) at all times to take advantage of intra-day swings, to reduce your position quickly in a sudden selloff, or to try to hold out for the last dollar of profits.
Selling to Free Up Capital
This part is easy. If you are holding several stocks in an advancing market, sell your laggard(s) to add to the winners. If a stock cannot run in a strong market, when will it? In a weak market, you may want to cut your stock(s) more slack - provided you prefer market vs. risk free cash returns.