How Long Should You Hold A Stock?
For day traders, the time dimension is essential, minute to hours. But they are typically seeking many small gains. Investors may hold stocks for years.
A simple strategy to plan for a stock purchase
An important question that many stock market investors ask themselves is, “How long should I hold a stock?” There are a few potential answers to this:
- Hold a stock until it makes a profit.
- Hold a stock until it either breaks your stop-loss rules or meets your profit requirements.
Hold a stock until it makes a profit.
This seems a very simple answer, but it is the wrong one. What if the stock begins a downward trend and you are stuck in a losing trade for a long period of time. You need to be able to very clearly set the rules of your trade before you enter the trade.
Hold a stock based on rules.
Here are some guidelines to follow before you buy a stock:
- What profit do you expect to make on a stock?
- How much could you foresee that the stock could go down?
- Is the potential gain on the stock more than the potential loss?
- Is the gain at least 1.5 to 2 times the size of the loss?
- What is the maximum loss you are willing to take on the stock?
- At what gain will you be looking to sell the stock?
- Is the stock in a downtrend, up-trend, bottoming, or consolidating?
Once you have answered these questions and set the rules, you are ready to trade.
However, there is still one important question to answer. How long should I hold the stock?
The time dimension in a stock trade
For day traders, the time dimension is essential, minute to hours. But they are typically seeking many small gains. This type of trading has higher risks. Many people also say that you should not hold a stock overnight as it is too risky. This is a fallacy as most gains in an explosive stock move are usually in out-of-hours trading.
The Golden Rule
Let us imagine you have purchased the stock, and you are 10% in profit after five days. You estimated a worst-case loss scenario of 5%. So your reward is now at 2 to 1.
Should you sell? Well, the short answer is No.
If your time frames for trade are medium-term, meaning holding stock from weeks to months, then your hold time will be longer. You hold for long as you are seeking to make a significant gain from a stock price move and not incur too many trading costs.
From the thousands of system tests I have done for the Liberated Stock Trader Fund, I can give you some guidance. The best rewards on a stock are typical with a hold time of between 40 to 50 days. It takes time for good profits to develop, and they certainly do not happen overnight, unless you are extremely lucky.
The typical high-profit trade in the LST Ultimate system is 30%, and the hold time is an average of 45 days. Also, the typical drawdown, which means how much a stock might pull back, is -11% to -15%.
Patience, in the Stock Market, is golden.
Be patient with a stock. Give it time to make you the profit you desire. A good move in the market takes time to develop, typically 45 trading days.
But beware, stocks can fall quickly; do not let your loss turn into a catastrophe. Limit your losses, but do not set your stop losses too tight, for example, 5%. A stock could pull back 10-15% before a big upward profitable move occurs. A typical losing trade can develop within 10-12 days.