IBD has two main rules for selling a stock: Take your profits at 20% to 25% and cut your losses at 7% to 8%.
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If you are buying stocks on breakouts from properly formed bases, following these guidelines will keep your head above water. But there is also a third option, one that can take your 25% profit and turn it into much more. It's called the eight-week hold rule.
If your stock produces a gain of 20% or more within three weeks of breaking out of a proper base, you may have a true winner on your hands.
IBD research shows that in many cases, stocks that make this quick and powerful move are capable of doubling or tripling in price. Unless your stock shows a clear sell signal, you should sit on your hands for the first eight weeks of such a move.
IBD Founder Discovered Signal
IBD founder William O'Neil conceived this rule in the early 1960's after being shaken out of Certain-Teed, a winning stock. In a moment of market weakness, O'Neil sold his position for only a two- or three-point gain. Certain-Teed tripled in price without him.
Doing nothing can be a challenge for investors, but your 20% profit cushion helps ease the difficulty.
Unless you are in danger of a complete round trip of gains, hold your stock for those eight weeks. It may appear to wane as it pulls back to or just below the 10-week moving average, but this action is normal.
After the eight weeks lapse, it is time to reassess the stock. It's likely your stock has returned to or surpassed the area of initial strength, and you can then decide when to sell and take profits.
How To Invest: Shopify's Monster Run
Shopify (SHOP) broke out of a deep cup base in April 2020. While deep bases normally don't work out, this was one of many deep patterns that formed during that 2020 bear market and still panned out.
Following the lows of the Covid crash, the stock ran up 24% in three weeks from the 59.39 buy point, triggering the eight-week hold rule (1).
The remaining five weeks saw the price continue to a superb 42% gain, then pull back nearly 19%. But Shopify did not cross below the 10-week moving average, which would have been at least a red flag. The eighth week closed at a split-adjusted 74.26, or 25% above the buy point (2).
Patient investors were quickly rewarded; the very next week ended with Shopify up 48% from the entry (3).
Since the breakout did not cross the 10-week line at any point, it would be logical to use that as your stop. In the week ended Sept. 4, 2020, the stock finally had a close below the 10-week line after notching a 64% gain (4).
The eight-week hold rule is a conditional tool: It is most effective in the first two years of a new bull market.
This article was originally published April 14.2023, and has been updated.
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