Learning Article : How and When to Book Profits?

After entering in to a perfect growth stock with promising fundamentals, it becomes even more crucial to book your healthy gains before it washes away. After a stock gives you 10%, 15%, or 20% within few weeks, it becomes difficult to decide whether to exit the stock profitably, or keep holding the stock as an up-trending momentum may give you further profits.

Here are some of the rules, based on extensive back-testing done on ~100 years of stock market history, which you can follow to guide yourself in such scenarios:

  1. After making 20–25% from a correct buy point (proper breakout from pivot level), most stocks retreat. It is a good time to book your profit, given it took time to reach that level (more than three weeks) and/or the base it rallied from was second-stage or later base. Stocks breaking out from third and higher stage bases have strong chances of failures.
  2. If a stock gives you 20% or more return in less than 3 weeks after the breakout, it shows rare strength and eight-week hold rule triggers. Under this, you hold the stock at least for eight weeks. Such stocks usually end up giving multi-fold returns.
  3. If the stock moves in your favour in erratic manner; for example, a stock shows unexplained intra-day volatility, moves down but ends higher giving you the gains, it is a negative signal. Such stock is likely to move against you and should be sold.
  4. If recently you’ve taken 7–8% loss in one of your positions, it is prudent to take your profits at 20–25% levels, or at least trail your profits from that level. However, if you’ve taken several 7–8% losses, and none of your recent picks have hit the level of 20–25% breakout from pivot level, you need to change your strategy. You may consider booking earlier than 20–25% to cover up losses in your capital. But more importantly, you should re-examine your stock selections, and characteristics of your breakouts/buy signals. You must also re-examine the overall market direction, and try to steer clear if the market is not in a Confirmed Uptrend.


Related: Selling rules: How to make most out of your trade

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Disclaimer: Information contained herein is not and should not be construed as an offer, solicitation, or recommendation to buy or sell securities. It is for educational purposes only.

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