Give Your Stock Wiggle Room; Don't Dump Shares Too Early

Investor's Business Daily

Unless you only put your money in a savings account, you can count on at least a little volatility when investing in the stock market.

If a stock you just bought falls a little bit, maybe 2%, 3% or a little more, don't immediately think you're wrong and hit the sell button. You often need to give it a little wiggle room and time to let things work out.

While it's nice to catch a stock that moves up day after day after getting it, it doesn't always happen that way. Even if you catch a high-quality stock coming out of a picture-perfect base in spectacular trade, there's no guarantee that it'll take off and shoot higher day after day.

Perhaps a couple of lines from the 1970 hit song "Rose Garden" by Lynn Anderson explains it best: "I beg your pardon; I never promised you a rose garden. Along with the sunshine, there's gotta be a little rain sometime.

The best thing to do: Be patient. Don't get emotional and try to micromanage the stock after every downtick. Watch, but don't touch unless it triggers a sell rule. Some traders might panic when their stock falls 2% or 3% or a bit more after buying in. But many fluctuations are natural. Some stocks will be more volatile than others. Sell when losses amount to 7% or 8%.

Of course, seeing your stock fall 2% or 3% soon after getting in is not something you want. But in most cases, you shouldn't bail just yet. Keeping stops too tight will leave you prone to getting shaken out of what could be good trades. Also consider this: You can use a weekly chart to see how day-to-day price fluctuations are really affecting the stock.

There is a time when selling at a 2% or 3% loss makes sense — during a bear market. While investors shouldn't generally buy stocks in a bear market, some investors may want to take a stab at an enticing .

In May of 2007, Chinese Internet juggernaut Baidu (BIDU) cleared a 132.90 from a cup-with-handle base in more than twice its average (please see a daily chart). Even with that show of strength, the stock modestly chopped around afterward.

By May 24, Baidu fell to an intraday low of 127.21, a little over 4% below the 132.90 trigger. (1) Despite pulling back in heavy volume, buyers soon returned for more shares.

Amid bumps along the road, Baidu bolted 65% by late July before pulling back to its 50-day moving average.

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