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.

Performance computations reflect a time-weighted rate of return and includes a brokerage of 0.5%. All holdings are rebalanced to equal rupee amounts daily. Dividends are not considered in computations. Percent gains and losses are calculated for all issues that remain on the “Current Holdings” at the end of the day. For stocks that were added to “Current Holdings”, the basis used to calculate the percent change is the price noted when the issue appeared as a “Current Holdings” in MarketSmith India. For stocks that were removed, the selling price used to calculate the percent is the price note d when the issue appeared as “Removed” in the MarketSmith India. For more information, see our Legal disclosures here.

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