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False Sell Signals Ė Donít Get Out Too Early

The inevitable has happened. You put in the effort to research your stock buying opportunity, justified that purchase of MEW Industries and made the purchase. Everything was going along fine and then it changed; the indicators that you used in your research have turned and you are looking at a negative situation. You have referred back to your research and your trading plan to review your next steps. Before you go any further, think about the possibility of false sell signals.

In an effort to protect their investments, many investors implement their stop loss strategies before they need to do so. Remember that one of the greatest dangers to an investor is greed and fear. If an investor abandons his/her stock trading plan and sells quickly based on false sell signals, he or she will either leave profits on the table or lose money selling after the price has dropped below the purchase price. Before you do anything rash, letís talk about false sell signals.

Most of the effort involved with the stock market revolves around fundamental and technical analysis; analysis of corporate stability, analysis of stock prices and analysis of stock market trends make up only a part of the efforts that an investor makes. When a stock turns and seems to be going contrary to the stock buy scenario, an investor needs to do more analysis and determine whether there is a real concern or whether these are only false sell signals.

Real Indicators with a False Conclusion
This can be a little tricky, the signals that can make up real sell signals are many of the same ones that make up the false sell signals as well. The difference lies in whether or not the analysis corroborates the sell signals. If it does, the sell signals are probably real and the investor needs to implement all of his/her stop loss strategies and techniques. If the signals donít match the analysis, the sell signals are probably false and the investor needs to consider a different strategy.

That being said, these are some of the sell signals you need to consider:

  • Rising stock price Ė This seems easy enough. An investor wants to hold on to hot stocks, not sell them right? All too often, traders will realize a modest profit and sell in spite of that fact that they have no reason to believe the stock is poised to fall. Blame this on overzealous adherence to defensive investing; if a stock has raised a small amount, that doesnít necessarily signal an impending fall in price. If your analysis holds up and there is no drop-off in sight, donít sell. Take the extra profits and be glad.

  • Falling price of stock Ė This can be the sign of both good things and bad.  Price drops can indicate a lack of confidence due to a company problem or it can be a market reaction to something totally unrelated. Again, this requires more analysis to determine the difference. If things have changed, this might in fact be a sell signal; if not, falling prices could signal that the investor needs to buy if possible.

  • Bad Wall Street news Ė Spend just a little time around the investment world and you will learn two things; first, there is plenty of bad news published about the stock market and second, stocks react to bad news. In the case of sell signals, it is important to determine if the news is directly related to your stocks and if so, if the news is accurate or not. If MEW Industries is a clothing manufacturer and technology stocks are driving down the market, you will likely find that the drop to be reactionary. If MEW Industries is being investigated for accounting fraud, you need to be doing some quick analysis and consulting your trading plan.

Conclusion
Being prepared to act is an important part of trading. Evaluating sell signals and determining the difference between real and false ones can make the difference between making a good or bad decision.

 

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