Hold and you might earn more, sell and you might earn more too. This dilemma haunts all investors more that we can admit because investors are constantly quoted with a different price on the market. Nevertheless, we are still “forced” to make a decision to either exit or stay on. The question behind this dilemma should be, ‘what are the considerations we should have in our minds when we are tested by aggressive volatility and greed at the same time?’ In this week’s post, we will answer this question with logic, objectivity, and reason so that more investors can make decisions without being tugged by emotions and subjectivity.
The big “GAP” and “WAP”
Weighted average price (WAP) is the average price of all the shares traded for the time horizon (usually calculated from the start of the day). However, sometimes when there is a spike in volume traded, the WAP will have a larger than usual GAP with the last traded price (current price). When this happens, it is normal for the current price to retreat back to the WAP if the volatility lessens. As such, it is possible to earn a few more cents by selling first before buying back again on that day. Even though this is not guaranteed, it does provide us with the added incentive if we are already intending to sell at a certain price.
Is the current profit worth it?
The amount of profits is treated differently by different investors. This is because we all start with different amounts of capital per tranche and overall capital thus affecting our profit targets. As a rule, we should always set targets based on our time horizon and percentage gains. Therefore, although there might be an incentive to hold, it is advisable to sell when the current profit is in line with your targets. Apart from that, we should always double-check our charts to see if there is room for the stock to climb. If there is room for a further rally, you can choose to keep your shares but you will have to adjust your price targets accordingly and a “stop-loss” price. This will help ensure that you are entitled to further rallying and maintain objectivity at the same time.
Are you ready to lose your gains?
Depending on your vested duration and entry price, sometimes exiting is a better strategy if you have broken even and have a better investment opportunity for your capital. In such cases, it will be wiser to swap boats rather than clinging on the same share counter which is unlikely to break resistance. Otherwise, always consider the fact that you might lose your gains in the next few minutes or hours. Such reality checks help us stay rational especially when there is an urge to make an impulse decision to stay or exit. The consoling fact is that there is no right or wrong move whereas all that matters is the gain or loss in opportunity cost.
Closing Thoughts
Sometimes waiting for target profits might be longer than expected and that throws us off our game when there is a sudden spike or a prolonged rally on the bottom (not your entry price). The danger lies in the belief that your gains are ‘secured’ and/or guaranteed overtime when the truth is that your gains can be wiped out in a matter of seconds. Even so, we should still stay objective according to our targets and strategies. Using suggestions shared in this post, you will be able to make the call with minimal regret after the fact.
