Hug lines

Sometimes we find ourselves owning a stock with a very low sell line compared to its current price. This usually means that it’s had a lot of growth over the last five years. But if you bought into a stock at, say, 18c and it went up to 24c, but is now 22c and dropping, and the sell price is only 5c, you might be tempted to draw a more aggressive sell line, sometimes called a “hug line” because it hugs the growth.

For example:

Instinctively we don’t want to see all of our profits disappear and we feel compelled to ignore the sell line. Tony thinks this is probably a bad idea. He’s seen too many stocks bounce back. You can even see this in the FEX chart above. It’s dropped by >10% on several occasions during its rise but then turned around and continued upwards. Tony’s inclination it to stick to the real sell line.

If you sell too early you might get pick it right once or twice and pat yourself of the back. But over 20 years, Tony thinks most of will get it wrong more times than we will get it right because we would be trying to guess what is going to happen. And guessing isn’t a great strategy. Trend lines give us a more scientific guide (although it’s still only an estimate) on where the market support is for the stock.