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Sound Rules, Tied To Condition Of Market, Improve Your Odds

Investing isn't about perfection.

The best that sound rules can do is put you on the side that has the best odds of winning.

When the Market Pulse shifts to correction, how should an investor react? Should they sell everything, nothing, or something

The condition of your portfolio dictates the answer to that question. In most cases, you're probably going to sell something and then watch the market closely.

Of course, you should avoid buying anything during a market correction. When most stocks are falling, the odds don't favor new positions or adding to a position.

There are other important rules to consider.

A stock that drops 7% or 8% below your entry should be sold, regardless of the market's condition.

People who refuse to sell a stock that's turned on them are like boaters who refuse to bail water because "the ocean's wrong about this boat.

What if you don't have any stocks dropping 8% below the ? You might consider three other reasons to sell a stock.

First, consider selling the laggard within your portfolio.

Second, consider selling a stock that has reached the 20%-to-25% profit level. Unless you're convinced that the stock might become a truly big winner, it's wise to take the profit. Most stocks begin to consolidate after a 20% gain.

Third, sell a stock if it threatens to cycle from a solid gain to a loss.

After that first sell or two, look for feedback from the market and feedback from the stocks you hold and the stocks you sold.

The point isn't to kick yourself if the stock you sold goes up, or pat yourself on the back if it goes down. The objective is to determine the trend of the market.

Additional weakness means additional sells. If you concentrate your investments among a few stocks, it won't take long to turn the dial from 100% exposure to 0% exposure, or vice versa.

What about the uptrend-under-pressure label

This can be more difficult. If you invest the IBD way, though, it becomes easier. How so

A market has to do something negative to earn the under-pressure label. During the days leading up to the pressure label, you might've been forced to sell a stock or two.

The reason? The didn't work, or the stock you've been holding began to act strange.

When it seems like you've lost your stock-picking touch, sometimes it's the general market that's losing its grip.

The point here is that if you follow the IBD way in a disciplined fashion, in many cases you will already have brought cash to the sidelines just before or as the market comes under pressure.

This helps if the market shifts to correction. If not, and the market shifts to resumed uptrend, then you have cash to commit.