Selling Into Strength

Selling into strength refers to the practice of selling out of a long or into a short position when the price of the asset is moving higher. The proactive strategy is designed to preempt an upcoming reversal in the price.

Opposite of buying into weakness.

Selling into strength is often seen as a conservative strategy for investors selling out of a long position since they're avoiding the temptation to time the market. On the other hand, the strategy is aggressive for traders entering into short positions since they're trying to time the market. If the stock continues to rise, the short seller could see losses mount and be forced to cover their position before a reversal occurs.

Many traders will wait for confirmation of a change in price movement before selling a long position or entering into a short position. However, by the time a reversal is confirmed, it may be too late and the trader may end up losing out. Thus, by trading against the prevailing trend in the anticipation that it will soon reverse, selling into strength provides greater margin of safety. As the saying goes, "missed money is better than lost money".

There are two different strategies that traders and investors can use when selling into strength:

• Lump Sum - Selling the entire long position or buying the entire short position at the same time.
• Averaging In - Selling the long position over a period of time to reduce exposure as the expected reversal approaches, or conversely, entering into the short position over a period of time to reduce losses until the reversal occurs.

In addition, traders may look at other technical indicators or chart patterns when deciding to sell into the strength. A great example is a stock that is trending higher, but losing momentum, over time. With the momentum moving lower, a reversal could be approaching, and it might be a good time to sell into the strength before the actual reversal occurs.

Suppose that a trader believes ABC stock will rise above $5.00 but expects it to reverse at $5.75. If the trader buys ABC stock at $5.00 and sells when the price hits a predetermined exit price of $5.50, that trader would be selling into strength rather than trying to capture the last $0.25 of profit before a reversal. Conversely, a short seller may sell into a rising price with the anticipation that the stock price will soon decline.