Indian equity markets, even though looking steady for the longer horizon, look quite stretched for the near term. Shohini Nath and Yogesh Supekar examine if it is the right time to book partial profits, while the DSIJ research team comes out with a list of stocks where at least partial profits can be booked.
Indeed, profit-booking is the key to market success and is as crucial as identifying investing opportunities. Majority of the investors invest their time in analysing stocks and identifying the best stock ideas, but very few give enough importance to “booking profit optimally”. Most investors do not have any profit-booking strategy. Profit booking decision, be it full or partial booking, should also be taken after looking at the market condition. Is it the right time to book profits in the markets or should one sit tight and wait for stock prices to inch up further? That is the key question to be dealt with for success in stock market investing.
Why book profits?
Equity markets never move in a linear fashion. There are rallies and there are interim corrections. Investment advisors usually advise investors to invest for the long term. The dilemma for the investors is that there is no clear definition of what is long term. Is it 1 year, 2 years, 3 years or 5 years? How does one decide how long to hold on to any stock?
One needs to keep booking profits regularly as the markets are dynamic and the business cycles may take a U-turn, thus impacting the stock prices negatively. Also, investors have financial goals and hence it is important that an investment horizon is predefined and profits are booked accordingly to meet the goals.
One can look at valuations and decide whether to book profits and how much of the profits to book. Ratios such as P/E and PEG can be used deftly in order to understand whether the markets are expensive or reasonably valued.
How to book profits using technical analysis?
Selecting the stock might be easier, but booking profits at the right price and the right time can overcome the greed and fear within you and help you play successfully in any given market condition.
We all are well-versed with the term “Trend is a Friend” and the share price charts help us to identify when the trend is about to change. Likewise, in an uptrend, the charts in combination with the volumes, indicators and oscillators, signal the change in trend. However, booking profits at higher levels well before the trend changes to bearish is what a successful trader does. Methodically, the stocks tend to work in a cycle, starting with:
- Accumulation, where the smart money enters the stock to bring some bounce in the prices, which are down or consolidating.
- Public participation comes in when the price gives a breakout with rising volumes. Indicators give a support to the price and oscillators bounce back from the oversold zone or positive crossovers from wherever they are lying earlier. The stock prices too start forming the candlestick patterns.
- Distribution is when the smart money exits from the stock as it reaches the anticipated price level.
- Panic selling, where the other participants too exit after the stock indicates reversal.
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September 17, 2018