Sell Systems: An antidote to the Abhimanyu syndrome

Here are the only 3 possible ways to sell a stock

Feb 17, 2024

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"You dont rise to the level of your goals.
You fall to the level of your systems" ~ James Clear, Atomic Habits

Buying right is important.
but if you don't sell right, buying right won't matter.
Selling right is, therefore, more important than buying right.

Having a sell rule will stop you from becoming an Abhimanyu.
Bro knew the entry to the chakravyu, but not the exit.

Paid with his life.

"The Abhimanyu Syndrome" in trading, is a common beginner-level syndrome.
If not corrected, can seriously harm your financial as well as mental well-being.

Do you also have the Abhimanyu syndrome?

Yes?
Worry not.
The good news is that it can be corrected.

In this article, I will teach you the only 3 sell systems that have a consistent edge leading to super performance.

Pick, any successful trader in the history of mankind and you will see they employed one of these 3 sell rules.

2 of them are discretionary and the 3rd one is systematic.

Assuming you have a perfect entry. let's say a breakout from a big base with a stop loss of 5%.
There are 3 possible outcomes of this trade:
a) Price hits the stop loss and you take a loss of 5%.
b) Price goes sideways and ranges between +4 to -4% from your buy price. Neither hitting your stop loss nor giving you a profit equal to the amount of risk you had taken (R).
c) Price follows through and a momentum burst ensues. Price moves 3-4% up continuously for 3-8 days and now looks extended.

If a) happens it happens.

If b) happens, you do nothing. Or cut the trade if the stock still fails to follow through beyond your time stop.
(Dont use a rigid/fixed time stop. As so often it happens that you are early into a trade and frustrated for some days/weeks into the trade, the setup has matured and is now ready to fly. Assess the price action and supply-demand first)

If c) happens, interesting things start to happen inside our brains.
I describe some of these below:
1. Greed kicks in. 15% up already. But with JUST 15% more, it's gonna be “just looking like a wow”.

2. Fear kicks in too. 15% up already. Ben Stokes! What if the stock falls from here and I lose my precious 15%?

3. Vivid visualization of the future events yet to happen (read overthinking).

Yo! What if I sell now and the stock goes up 15% higher from here? Man, I am gonna kick myself then.
Wait, what if I don’t sell now, and then the price returns to my buy level? How will I be able to live with that?
How will I ever show my face to my wife again?
So on and so forth. You get me, right?

These are pretty normal emotions if you are human (and not an algo bot).
The idea isn’t to stop having these emotional reactions. But to stop reacting impulsively to them.

How do you do that?
By having a SELL system.

Sell Systems:

So here is what you can do:

1. Sell into strength:

The stock is up 15% in 3 days and is approaching the end of its momentum burst. It is now extended on the daily timeframe. You can sell the stock while it is still strong before it starts pulling back.

This is more suitable for a swing trader. Quick in when a move starts, quick out before the move fades. Peak.

2. Sell into weakness:
You hold on to the stock till the uptrend continues.
i.e. till the stock continues to form swing highs and swing lows.

Stocks on an uptrend tend to move in an ascending channel. They trend up (make a flag pole) and form a base (flag mast or the Darvas box), break out, and trend higher.

Hold it as long as this action is not violated.
The moment the stock breaks down instead of breaking out from the base, the uptrend ceases to exist. we now have a nascent downtrend.
This is the point when you sell into the developing weakness.
This style is best suited for a positional trader.

Hybrid system (bonus system):

Instead of selling 100% position into strength, you may sell only a portion of it (I sell 50%) and keep the rest of it for the possibility of catching a longer move. This remaining position can then be sold into weakness as described above.
(of course, you trail using a sound trailing system).

3. Sell at a multiple of predefined risk (R):
You see, the above 3 systems need some level of discretion.
This one doesn’t.

The risk(R) is predefined.

The multiple at which to sell is also predefined.

Hence, this is a systematic system.

Doesn't matter where the swing top or the bottom is, you will have a fixed pre-determined price at which you sell.
You sell at an X multiple of your risk (R).
if R is 5%, you call sell at a profit of 5%, 7.5%, 10%, 15%... n*R%.

How to determine at what multiple of R?

This is a whole different question and needs another system plug (depends on the combinations of 1. Market conditions 2. Your trade statistics e.g. Batting Average 3. your Risk on portfolio per trade etc.).

So these are the 3 different systems which should govern all your sells.

As a beginner, you wouldn't know which style/system will suit you.

My advice would be to go crazy and try these and get a feel for yourself.

Then decide to stick with one.
Not all styles will suit you. That much I can guarantee.

Personal preference due to psychology aside, not all of these systems will work equally well in all market conditions.
A super trader is therefore adaptive and uses a combination of these as and when the conditions are suitable.

For example: Market Miervini won the USIC 2021 by taking fat positions and selling them into strength. It was a choppy market. Holding on for longer in the hope of getting a larger move would’ve seen most of his profits vanish.
Whereas Darvas amassed millions by holding his positions tight for a bigger move and selling into weakness.

Needless to say, it's a higher-level skill. Takes time. And is acquired with more time and experience in the market.

You will get there too.

What is my sell rule?
I employ the hybrid system consisting of both selling into strength and selling into weakness.

My low conviction trades are derisked at a certain risk multiple, on the follow-through move, and the rest I hold for a potential longer move.
My high-conviction bets are purely planned to be sold on weakness. These positions are also where I might pyramid up using different entries as they move higher from my initial buy price.

That was it.

But allow me to leave you with this short visualization.

This bull market is going to end (Well, sooner or later). You have a lot of unrealized gains. One fine day there is a blood bath on the streets. Your PF is swimming in blood. You don't know what to do. You are in a heightened state of panic. So much blood, you freeze to see your account down -5%.
Before you know it, it's down another -5%.

Immense pain follows, there is no end to the angst.

At that moment you realize.
All of this pain is because you don't have a sell system.
But the pain is unbearable.
It's really bad.
You scream out loud.

And suddenly wake up.
In sweat.

It's 3 am, Saturday.
In about 10 seconds you realize it was just a bad dream.
Another 10 seconds into it you realise it is never going to happen to you.
Coz you read the Technical Take.
You feel a little better now.
Pulse is getting back to normal.

You take a glance at your cell phone.

3.02 am.
less than 4 hours for another peak article incoming.
You feel much better at this point.
And quietly go back to sleep.

Thank you for reading The Technical Take. Please share it if you find this valuable. Thanks

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