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Post #5227

Riding the winners can be very dangerous. A stock will reverse direction instantly, whenever more people want to sell than want to buy. There is no way to predict when that will happen, and no way to recognize when it happens except after the fact when it is too late.

Riding the winners is dangerous only to those who fail to protect their profits on the way up. It's interesting how many people have experienced gains in a stock only to allow them to evaporate after the stock has turned and gone in the other direction. Enron and Lucent are good examples. While it's true there is no way to predict when this will happen, you most certainly can recognize this event by using charts to monitor the price and volume action of the stock you're holding. If your particular stock starts to experience abnormal price and volume action, to the up side over a short period of time, this is usually and indication the party is about to come to an end and it may be time to get off while others pile on. Unless you're extremely lucky, there's no possible way to exit at the top. Something will always be left on the table. The use of trailing stops will help to protect your gains if you choose to ride the stock until it reverses and starts its decent.

However, you can protect yourself from the reversal by placing stop loss orders at a chosen percentage (7% is common) below the price. The disadvantage of this is that you may get 'stopped out' on normal volatility.

A stop loss order of 7% is usually placed after your initial purchase to protect your principal if you're wrong on the stock and the trade suddenly goes against you. Using a 7% stop loss after 200%+ gains appears to tight at this level and will probably end the ride prematurely. A trailing stop set at 15 to 25% will allow some room for the stock to go through its normal ups and downs without stopping you out too soon. If you do get stopped out and the stock continues its run, you can always buy back in.

I don't believe in momentum, so when I think a stock is too high for market conditions, I start asking myself questions. If I had new money, would I invest it in this stock? If I sold, would I have a better place for the money?

Momentum is everything. It's what drives stock prices higher and higher and allows for gains of 100%, 200%, 300%+. Former owners of TASR, GOOG, CME, TZOO, NGPS, DCAI, and HRT, to name a few, would have something to say about how momentum affected their price movements.

Nobody should have to consider selling because their stock has returned exceptional gains. What the owners of these stocks, or any stock for that matter, should learn is how to protect their gains and limit their losses.

Let your winners run, cut your losses short and over the long run your Social Security checks will be pocket change.

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