Thumb rules for master traders
A smart trader should be impatient with loss yielding stocks and try to exit from the market even if it is a loss. Because this loss can be recovered from other stocks rather than holding onto these
There is a famous saying that Patience is a virtue. Does this apply to stock market also? Let us have an analytical view on this.
Almost every trader's portfolio has stocks which yield profits and stocks which give loss.
The moment a trader earns two to three per cent profit or even more the first thing he does is to book profit and exit from the stock.
The profit earning stock compels him to book profit and here the trader shows impatience.
Contrary to this situation is where the trader clings onto the loss yielding stocks. These stocks eat a major portion of his capital and profits. He is very patient with these stocks.
Actually, a smart trader should be impatient with such stocks and try to exit from the market even if it is a loss.
Because this loss can be recovered from other stocks rather than holding onto these.
The stocks are in loss probably because of wrong stock selection or incorrect analysis.
Whatever the reason maybe but it is most likely to continue in downtrend. So, it is better to be impatient with losing positions.
When a trader holds onto position which is fetching him losses he experiences feeling of discomfort and it refrains him from rational thinking.
Sometimes there may be a strong inner feeling which prompts him to exit from the stock.
He cannot come out of the negativity until he exits from the stock because this keeps reminding him about his mistakes. There is a continuous emotional turmoil going on inside him.
If a trader has selected a stock and starts getting profit after entering, he should understand that this was a right choice and he should continue to ride on it. Profits signal right stock selection and analysis.
A trader should always book windfall profits. Sometimes a stock may yield a profit of 20 to 30 per cent.
This happens in extreme cases and it is always good to book profit and exit from the stock in such cases.
Just as there are ups and downs in life so does a stock market with uptrends and down trends.
After the trend has stopped, we can see that certain stocks have stood the test of time and even though they have fallen they withstood in the market with strength and less volatility.
Such stocks are promising and prove to perform well even in adverse market conditions. This is somewhat like finding an opportunity in adversity.
After a series of success, you get profits and confidence. After achieving profits consistently, it is better to exit because you have the opportunity of reentering the market at any point of time.
When a stock is fetching profits multiple times, it is better to book profit and exit because there is a risk of the profit fetching stock turning into a loss.
Exit from stocks which are continuously fetching profits as there is every chance of the price going down further.
One should exit from the stock at least at the break even point. Follow these rules for reaping consistent profits.
(The author is a homemaker who dabbles in stock market investments in free time)