Friday, April 01, 2011

20% Rule For Big Profits

Investor's Corner: Use 20% Rule For Big Profits

You'll never know for sure if a stock is going to be a huge winner if you sell it too soon. So if the stock you just bought makes a big jump right away, resist the urge to take the money and run.

Watching a stock go up after you sell it can be truly frustrating. That's where the eight-week rule comes in. The rule states that if a stock breaks out from a proper base and gains 20% or more in three weeks or less, you should hold it for at least eight weeks.

It's normal for a stock to pull back after breaking out, so don't panic unless the stock starts to give back the bulk of its gains. Only then should you sell. You never should turn a good profit into a loss.

Stocks that gain 20% or more soon after the breakout are showing you unusual power. These have the potential of doubling, tripling or more.

The eight-week rule is designed to help you avoid the heartache of missing out on what could be a monster winner. Stocks that surge hundreds of percentage points will seldom do so in a short period of time. Big gains need time to brew.

In "How To Make Money In Stocks," IBD founder and Chairman William O'Neil wrote, "Your objective is not just to be right but to make big money when you are right."

If you bought a stock with great earnings and sales growth, healthy margins and institutional sponsorship as it just cleared a base, you have to give it time to do its thing. In investing, patience is a virtue.

Avoid thinking too much once you're in the stock. You don't have to watch every tick. Doing so can cause you to get shaken out. But be aware of signs of weak action and act if they appear.