Chris Rowe

How to Sell at the Right Time

by Chris Rowe   07/30/09

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When you're entering a stock or option position, not only is it a challenge to find the right one to trade, but also the best time to buy.

There are lots of indicators out there that can tell you when it's time to buy, but once you've initiated a position, you've got an equally difficult decision in front of you: When do you cash in or cut bait?

In other words, how do you know when it's time to sell?

Everyone, including the top technical analysts on earth, agrees that picking the right time to close a position is much harder than picking the right time to buy, so you're not alone.

So I'm going to share a signal with you that you can use to help you decide when to exit a position.

Looking for a Sign? Try the Relative Strength Index

The Relative Strength Index (RSI) was developed by J. Welles Wilder Jr. in 1978, and is one of the most helpful, widely used indicators employed by chartists today.

First, it is very important that you don't get this confused with other types of relative strength indicators. This does not have to do with relative strength when compared to the market or other sectors. (Learn how to determine the relative strength of a sector.)

This momentum oscillator is related to the stock's current strength relative to its own recent strength.

To oversimplify, the relative strength of a stock is the average price change of the

advancing periods with the average change of the declining periods each day or week, etc. The number is then "smoothed" by using the previous period's average gain and average loss.

When the average gain is greater than the average loss, the RSI rises. And when the average loss is greater than the average gain, the RSI declines.