If you have very traditional mutual fund(s) where you invest your money then buy and hold is probably a valid option for you. The account managers already buy, sell, leverage, hold cash, and do whatever else to maximize their returns. However, you may have noted that I said "their" returns and not "your" returns. If you'd like to take financial control and responsibility of your own life then you need to consider when it is appropriate to sell your investments.

I started this topic in What Are 5 Questions You Should Ask An Investor? and I'd like to expand on the idea here.

Here our three reasons I'd like to talk about in this hub:

1. Save Capital
2. Take Profits
3. Pay Yourself

The biggest problem with losing money is you no longer have it to make more money. When you lose 50% of your trading account on a series of bad trades it will take a 100% return to return it. What? I know, percentages can be hard to follow, let's just look at it:

You have an account with $1000 and you lose half which leaves you with $500. To get back to where you started you need to make $500. When you had $1000 you'd only need a 50% return to make $500, but now that you only have $500 you need to make a 100% return. Sometimes just saving your money is much easier than coming up with big returns later.

One way to save money is to use a stop loss. You can set it to a hard number like "down $1 per share" or by a percentage like "down 2%". How do you know where to set your stop loss? There is a couple of different thoughts, one is money management. You want to make sure you never lose too much of your investing capital in one swoop. Two percent of your capital at risk is often considered a good number to start with. If you don't lose stop losses you could lose all of your investment on a trade so you'd have to find 50 different stocks at 2% each to be fully invested. That's a lot of diversification and will likely give you market returns. If you've found a strategy that finds you better choices you can use the stop loss and throw more money at it. If your stop loss is at 10% fall then you could put 20% of your portfolio in that stock because the most you'll lose is 10% of 20% which equals 2%.

Another thought is to use technical indicators to look at where a trade has turned on you and use that as your stop loss.  However, if you use this method you'll just adjust how much you invest on the trade by your max portfolio loss risk.  For example, if you have $1000 and you think your trade will turn wrong at a 5% loss than you can risk 40% or $400 on this trade because the most you'll lose is $20 or 2%.  However, if the turning point is set at 1% loss then you can risk all of your money on the trade because you'll bail at a $10 loss or 1%.    

Stocks go up and down, we all know that.  We're also told that the stock market goes up most of the time and if we just hold on you'll make your money.  In spite of all that the most famous and down to earth stock market advice is still buy low, sell high.  We all love to look for deals and buy low, but we seem to have a harder time accepting that our investment choice may now be too high. 

One method of choosing when to sell your stock is when you made your money on the trade.  If you'd be happy making 15% a year and your stock rallies 15% in 3 months you could just lock that win in by selling and buying a safe dividend stock, bond, or your next best buy choice for the year.  Then you've made your goal plus some.

The other method is to have a plan before you buy when you think the stock price is too high.  You could use technical indicators like resistance points or chart patterns, fundamental choices like price to earnings ratio, or my favorite, just looking at what percent the stock has grown over the last 10 to 20 years and seeing if you have now way exceeded it.  If a stock grows 8% per year on average and now it's grown 25% in one year without much change in the company (and it's hard to change a multi-billion dollar company) then odds are it will be flat for a few years while the earnings catch up with the price.