Is selling a tougher decision than buying?

The goal of trading is to be profitable; however, not all trades end up in profit as some make losses. A successful strategy is the one that will help you realise profits and cut losses short.

There will be times, when you have booked your profits and find that the stock price is still going up and looks strong. At a certain point, you may feel that your decision was wrong and could have gained higher profits had you patiently waited. This is typical human nature.

Another common mistake often made by investors is that they wait for the prices to reach a break-even point, as they don't want to face loss. This particular situation arises, when you buy a stock only to see it drop quickly. So you wait for the prices to reach the buy level to sell it. But, in the end, if the price recovers after they have been sold, these investors often discover that they should have had more confidence in their reasons to buy the stock.

As mentioned above, the basic objective of every account should be to show a net profit. To retain your hard earned money, you must sell and take these profits. The key is to know exactly when the appropriate time is - Exit, if the stock prices breach the 50-DMA; exit, if the stock falls 8-9% from your entry price; follow a trailing stop-loss method to preserve profits.

If you fail to book early profits thinking that the prices will still go up, then there are chances that you could end up exiting with a loss if a correction sets in. So, how does one avoid that loss? A trailing stop method can be employed to preserve profits. Once a certain profit target has been reached, a stop order is placed to ensure that a percentage of the original maximum profit is retained. The percentage of gain to be retained can be a fixed amount or a certain percentage above your entry price. In this method, the stop loss will go up in tandem with the stock price. But, if the stock price is dropping, the stop loss will not change. The advantage that this method offers is that it removes bias.

There is considerable risk in all common stocks, regardless of their name, quality, blue-chip status, previous performance, or good earnings. There are no safe stocks. Any stock can underperform at any time and you never know how far it can go. So, it is better to be little conservative and be on the safer side by booking profits and thereby protecting your hard earned money.

The writer is CEO, MarketSmith India