6 Signals to Take Profits Off the Table when Trading
Investing in the financial market is a fine art of balance. Every investor seeks to maximise their trading profit against a given level of risk. However, confusion starts to brew when Nifty and the Sensex start climbing up the charts, and there is a debate of whether you should hold the stocks or sell them for current trading profit. The good news is that you need not eye your trading account suspiciously and make a wild guess.
Published on 12 January 2022
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To help you make more informed decisions about when to book your profit, here is a 6-point stock profit-taking strategy guide to navigate your way through Nifty and the Sensex and maximise your trading profit:
1. Examine the Momentum
Buying is an important indicator of the future performance of stocks. If the momentum of your stocks starts to recede at higher levels, then it might be time to reverse your trade. This can be verified by analysing the history of pharma and IT stocks between 2015 and 2017 that went downwards.
Prior to the selling of stocks, there was a clear absence in the buying of these stocks on the Nifty and the Sensex. When there is a consistent fall in the momentum of the purchase of stocks at the higher level, then it is a clear indicator to log into your trading account and book your profit. Know More about Most Accurate Intraday Indicators
2. Apply the Rule of 72
This is slightly tricky to understand because it needs you to do some maths and also tap into your intuition and make a personal judgment. The rule of 72 is commonly employed to ascertain the number of years needed to double the invested capital by considering the annual rate of return.
The rule of 72 formula is –
Years to Double Trading Profit = 72/Rate of Return on an Investment (Interest Rate).
The formula gives a fairly accurate analysis. Elaborating with an example, consider that you are making a 15% profit every month. Applying the rule of 72 formula, it would take 4.8 months to duplicate your capital. However, the nature of the capital market is such that you will need more than just mathematics to make the right decision.
To properly apply this rule then, think of whether you can earn 100% in the coming 4.8 months by holding your position. If the answer is negative, it is time to close the deal.
3. Beware of Sudden Bursts in Trading Profit
If it feels too good to be true, then it probably is. If your stock price shoots up in a quick burst over a relatively short span, then those are some red flags you mustn’t ignore. A fear that grips novice investors is regretting selling the stocks before they peak and missing on favourable gains.
However, if the trading profit seems to be soaring at small intervals, it is an indicator of inconsistency, and it would be wise to take the profit off the table.
4. Don’t Lose Sight of the Basics
Amongst the 6 stock profit-taking strategies, this one is fairly simple. A climbing stock that is making a higher profit can be held. Contrarily, a falling stock with lower bottoms needs to be sold.
Also note, that long-term stocks that have been consistently falling should also be sold, as should stocks that spurt inconsistently.
5. Prioritise Capital Protection Over Trading Profit
This one is important because it is often ignored. Although we all enter the capital market and engage in the varying moods of Nifty and the Sensex to maximise our trading profit, one crucial thing that investors must bear in mind is to first secure their capital. Also Read: When is Intraday Profit Credited
Analyse your financial portfolio to identify whether you are overexposed to market fluctuations and if the worst scenario loss can leave you in a financially vulnerable situation.
6. Consider Market Liquidity
Finally, keep an eye on the market liquidity and the factors that can constrict it. Some of them are as follows:
Slowing FII and DFI flows
RBI tightening the liquidity or increasing rates
Increasing call money rates, etc.
Aside from these 6 stock profit-taking strategies, there are several other indicators that investors employ to know whether they should hold their stocks or sell them. However, these can be referred to as a general guide. Also Read: Step By Step Guide on How to Buy Stocks Online
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Most people associate investments with a demat account, but there’s a huge difference between that and a trading account. While the former allows you to hold all your shares and securities in one place, it doesn’t have the option to initiate trades by buying or selling. That responsibility is entrusted to a trading account.
As the name suggests, online trading is the exchange of financial instruments through a brokerage's internet-based proprietary trading platforms. Online trading facilities have increased dramatically since the late 90s with the introduction of affordable computers and high-speed internet. Stocks, mutual funds, bonds, ETFs, options, futures, and currencies can all be traded online.
To enhance the customer experience, the trading platforms of depository participants have a customer-friendly interface. To sell stocks, log into your account, search for the stock you want to sell on the trading platform, and place a sell order on it.
As per SEBI’s 2019 mandate, while you can hold physical shares, you cannot trade them without a trading account.
To open a trading account:
Find a trustworthy depository participant (preferably the same one with whom you have a Demat account)
Fill the trading account opening form
Complete your KYC by submitting the relevant documents
Sign the agreement with your DP.
Once the verification process is complete, you will receive a unique customer ID to access your trading account.
Related Articles
Guide to a Trading Account
Most people associate investments with a demat account, but there’s a huge difference between that and a trading account. While the former allows you to hold all your shares and securities in one place, it doesn’t have the option to initiate trades by buying or selling. That responsibility is entrusted to a trading account.
As the name suggests, online trading is the exchange of financial instruments through a brokerage's internet-based proprietary trading platforms. Online trading facilities have increased dramatically since the late 90s with the introduction of affordable computers and high-speed internet. Stocks, mutual funds, bonds, ETFs, options, futures, and currencies can all be traded online.
To enhance the customer experience, the trading platforms of depository participants have a customer-friendly interface. To sell stocks, log into your account, search for the stock you want to sell on the trading platform, and place a sell order on it.
As per SEBI’s 2019 mandate, while you can hold physical shares, you cannot trade them without a trading account.
To open a trading account:
Find a trustworthy depository participant (preferably the same one with whom you have a Demat account)
Fill the trading account opening form
Complete your KYC by submitting the relevant documents
Sign the agreement with your DP.
Once the verification process is complete, you will receive a unique customer ID to access your trading account.
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