Valeant Pharmaceuticals (VRX) tells another side of the story. It broke out of a 14-week base last May 27 1. The buy point was 23.33.
The breakout came in a big surge of volume. But here the temptation was to sell, not hold, as the stock rose just over 4% then pulled back.
IBD research of leading stocks over many decades shows that winning stocks almost never drop more than 7% to 8% below the buy point after a breakout.
Valeant stuck to the historical precedent. The stock pulled back twice, including one sharp reversal, before staging its winning run. But those who bought at the ideal buy point never saw shares decline more than 5% 2.
What if you bought a stock in stages, with half your position to start, adding shares as the stock proved itself? How do you determine when you've reached a 7% or 8% loss?
That comes down to your personal preference. You can choose to sell each chunk of your investment as each hits a 7% loss, or figure out the average cost and sell at that price.