One of the most challenging parts of investing is knowing when to liquidate your positions. When you have a losing position, your mind will tell you to have hope and wait for the price to turn back up and maybe even make a decent profit. For a winning position, you might be reluctant to close too early and miss the rest of the benefits. So, when should you pull out?
When Fundamentals Change
Macroeconomics is a significant catalyst for financial markets. Even if you didn’t buy an investment product based on macroeconomic events, it could still affect your position. Some activities to watch out for include civil unrest, geopolitical tensions, natural calamities that affect supply and demand, and/or an epidemic. For instance, right now, financial markets are plunging to record lows due to the recent viral outbreak. This is an excellent time to reassess any bullish positions.
When Technicals Change
Technical indicators, like Bollinger Bands and Stochastics Oscillator, tend to lag behind real-time prices. Nonetheless, they are an excellent way to gauge market conditions and consumer sentiment. Sharp turns in technical indicators can foreshadow an impending drop or spike in the price of a financial product.
When Data Doesn’t Add Up
If a company’s press release or earning call doesn’t line up with their financial statements and balance sheets, it’s time to start investigating what’s going on. Optimistic statements by company executives without any reliable support from financials are a red flag. Always look at the numbers. If you see a downward growth trajectory, start unloading your positions.
When the Asset Becomes Too Volatile
If a stock or commodity moves in both directions too frequently and in big leaps, it’s a sign that the market doesn’t know how to value the asset. It may be safer to sit it out on the sidelines and reenter once the asset gains a more precise price direction.
To avoid the problem of not knowing when to pull their capital out, investors should always establish a stop-loss target before entering a trade. A stop-loss is a price point in which the position should be liquidated after the asset reaches it. Most investment brokers have a stop-loss feature that automatically closes when that price is hit.