When to Sell: A William O'Neil Guide to Taking Profits and Cutting Losses in Growth Stocks

William O'Neil's CAN SLIM system is renowned for its ability to identify high-growth stocks with the potential for explosive gains. However, knowing when to sell is just as important as knowing when to buy. For the experienced trader, a disciplined and well-defined selling strategy is essential for maximizing profits and minimizing losses.

The Cardinal Rule: Cut Your Losses at 7-8%

O'Neil's most important selling rule is also his simplest: cut every loss at 7-8% of your purchase price. This is a hard and fast rule that should never be violated. A stock that drops 8% from a proper buy point is a broken stock, and there is no reason to hold on in the hope of a recovery. Hope is not a strategy.

The 7-8% stop-loss rule is not arbitrary. It is based on O'Neil's extensive research of the market's biggest winning stocks. He found that the vast majority of these stocks never dropped more than 8% below their pivot point after a proper breakout. A stock that violates this rule is telling you that something is wrong, and you should listen.

It is important to note that the 7-8% stop-loss is based on your purchase price, not the current market price. This means that you need to be disciplined and exit the position as soon as it hits your stop, regardless of what the stock does afterward. It may be painful to sell a stock for a small loss only to see it rebound, but it is far more painful to watch a small loss turn into a catastrophic one.

Taking Profits: The 20-25% Rule

O'Neil's primary profit-taking rule is to sell a stock after it has advanced 20-25% from its breakout point. This may seem counterintuitive to some traders who are used to letting their winners run. However, O'Neil's research showed that many growth stocks will top out and correct after a 20-25% advance. By taking profits at this level, you can lock in a solid gain and move on to the next opportunity.

There is an important exception to this rule. If a stock gains more than 20% in the first three weeks after its breakout, it is a sign of exceptional strength. These are the "super-stocks" that can go on to have monster runs of 100% or more. In these cases, you should hold the stock for at least eight weeks before considering selling. After the eight-week hold, you can then trail a stop-loss to protect your gains as the stock continues to advance.

Other Sell Signals to Watch For

In addition to the 7-8% stop-loss rule and the 20-25% profit-taking rule, there are a number of other sell signals that traders should be aware of:

• Climax Top: This is a sign of exhaustion in a stock's advance. It is characterized by a day of huge volume with a small price gain, or even a price decline. This is a sign that the institutions are unloading their shares, and you should be too.
• Third- or Fourth-Stage Base: A stock that forms a series of bases is a sign of a healthy uptrend. However, by the time a stock has formed its third or fourth base, it is often extended and vulnerable to a correction. O'Neil recommended avoiding stocks that are breaking out of late-stage bases.
• New High on Low Volume: A stock that makes a new high on low volume is a sign of weakness. It indicates that there is a lack of institutional buying to support the advance. This is often a precursor to a correction.
• Breaking a Key Trendline: A stock that breaks below a key trendline, such as its 50-day moving average, is a sign that the uptrend is losing momentum. This can be an early warning sign to take profits or tighten your stop-loss.

By developing a disciplined and well-defined selling strategy, experienced traders can protect their capital and maximize their gains. O'Neil's selling rules provide a proven framework for navigating the complexities of the market and achieving long-term success.