When it comes to trading, timing is everything. Trading, by its very nature, will typically involve stocks that can have a big move up or down in a short period of time. That time period may be a few months, a few weeks, days, or even intraday. So, when it’s time to “get out” you want to be out of the stock as quickly as possible, because the stock could move against you 5%, 10%, even 20% in a very short time, making you lose money.
With so many millions of shares exchanged every single day, it’s easy to forget that the stock market is a MARKET – there must be a buyer for every seller; there must be a seller for every buyer. 99% of the time when you buy a stock, your order can be filled instantaneously because there is enough liquidity in the market for someone to match your price. If you’ve ever traded options, you quickly realize how much the market really is a MARKET – sometimes there won’t be someone on the other side to take your trade, and you’re stuck holding the option for a loss.
So, whether it’s stocks or options, you always want to know there’s enough volume to exit your trade, and when it’s time to do so, you’re able to exit quick.
When a stock is rising, there are more buyers willing to purchase shares at an ever-increasing price. As sellers offer to “sell” their shares at a higher price, they immediately get snatched up by a buyer. At some point, buyers don’t want to pay that higher price and the pace of buying slows down, thereby slowing the pace at which sellers can unload their shares. This push and pull happens every second, every day, every month, over the course of years which makes a stock gradually go up or down over time.
So, when you sell into strength, you are not waiting for that plateau, where there are no more buyers. You are taking your profits while the “getting is good,” like leaving the casino right after you hit, because you know the house will eventually win.
This means that you will not realize your trade for maximum profits, as you would have to time the top perfectly; it does mean you’ll be able to unload your shares in milliseconds, realize your gain, and move onto the next trade. This is critical when you’re trading right before close, or earnings, or some other event and need to get out.
Sell into Strength so you’re not left holding the bag. The buyer on the other side of the trade (who you don’t know) is thinking you’re crazy for selling at such a price, because they think the stock will continue to go up substantially – that’s selling into strength (the strength of their belief). You’re choosing to not be greedy, and if done correctly, you’ve already made a decent gain on the trade and the few percentage points won’t matter.