In trading the stock market, no-one has a crystal ball. The price of stocks can go down, as well as up. What is needed is an exit strategy that will enable you to survive the bad stocks, and make a good profit on the good stocks. it won’t be enough to simply buy and sell the shares every time there is a change in the price. There should be a plan and a strategy in order to make sure your investment succeeds.
There are two ways of doing this. The simplest method is to decide on how much you are willing to lose as a percentage of your investment. A good rule is not to go less than 10%. Work out the price of the stock at this level and set that as your stop loss. As the price of the stock increases, keep moving the level of the stop up to keep the percentage gap the same.
Some brokers offer a trailing stop loss service, where you tell them what percentage to set the loss at and they do it for you.
Regardless of what some investors say, there is no clear formula that can predict if a stock will be successful in the future. there are lots of things that cannot be measured. This creates the risk that is a characteristic of the stock market.
In order for people to minimize these risks, different techniques have been created over the years. Here are some of them:
This is a strategy that attempts to take advantage of even small changes in the price of the stock. When a stock has become profitable, the investor then sells it. For example, you buy a stock of Company A at Php 50. Then, at the end of the day, it rises to Php 55. You will then sell the stock to make a Php 5 profit. This may be small, but repeating this over time has the potential to make large profits.
This is one of the most famous investment strategies. Many believe that it is easier to time small increases in the prices of stocks rather than large ones. However, this can be tiring — “scalpers” usually make up to 200 trades in a day.
When scalping, it is important to not be “greedy”. This is an advice that you will often hear from experienced investors. In this case, being “greedy” means trying to wait until the price of the stock grows higher.
This was one of the first lessons I learned when trading. I waited for a specific stock’s price to go up, only for it to go down lower than when I bought it. I would have gotten a profit had I sold it when I first saw its increase.
This is a strategy that goes against the common sense rules of the stock market. Usually, investors buy the stocks when the price is falling, and sell them when the price starts increasing (just like scalpers).
However, faders buy the stocks when they are increasing, and sell them when the price is starting to fall (the exact opposite of scalpers).
Because of this unusual process, fading is very risky. It is only for those investors with a high “risk tolerance” (those who can afford to lose a lot of money in the short term).
However, it has two advantages. First, it does not need any difficult analysis. Second, faders can gain good profits, if they are successful.
We have already mentioned that the stock market changes often, everyday. The daily pivot strategy aims to buy stocks at the lowest price of the day, and to sell at the highest price of the day.
For example, the stocks of Company A is normally at Php 40. Towards the afternoon, it goes down to Php 37. This is the time for you to buy.
Then, let’s say that before the stock exchange floor closes at 3:30 PM it goes up to Php 50. This is the time for you to sell. But then again, we cannot predict when or what time the value of the stock will go up or down.
Investors who use the momentum strategy usually keep a close watch on news about the different companies they are thinking of buying. When they receive positive news or see a strong movement towards the company (such as lots of investors buying the stocks), they see it as a sign to start buying stocks as well.
Momentum investors will keep the stock, and then sell it when the price starts to go down. This relies on careful research and instinct, so it might not be best for beginners.
Reduce the Brokerage to Maximize Your Profit
Trading comes with lots of transaction charges, these charges always paid by you whenever you trade.
There are different transaction cost incurred while trading :–
- Security transaction tax
- Transaction charges
- SEBI charges
- Education cess
- Higher education cess
- Stamp duty
- Service tax
You pay these 8 different charges, when you do a transaction in stocks, futures, options or currencies.
Where you can reduce the cost in trading?
This can be reduced in the brokerage charges that vary from broker to broker. Now, just take a look at example:
If you are trading with Angel broking, then for Futures trading they charge 0.05%. That means if you buy Nifty future at 7500 so you will need to sell it above 7507 to start making profit. That’s about 7 points.
If you buy Nifty future at 7500 and if you sell it at 7501.25, you will still make a profit. Therefore intraday traders can maximize profits by reducing the cost of transaction.
For Nifty options traders, if you buy nifty 7500 call at 100 and sell it at 100.3, i.e selling it higher by 30 paise, you will still make profit. This is possible when brokerages charges are very low, we offer lowest every brokerage to our site visitors.
Using the Stop Loss Strategy
Using the stop loss as an exit strategy, only works if you stick to it, and not lower it, thinking that the price will go up again in a few days. In a few cases you will be right, but what usually happens is the price keeps moving against you, and you loose even more money. As a secondary to this, the money still tied up in the first stock that is falling can’t be used on another trade.
Finally, a word of warning about using the stop loss system to protect your capital. There are times when the markets undergoes a fast fall in price, there are regulations about how far a price can fall in one-day. If it falls this maximum distance, it can bypass your stop loss, and you may be unable to sell. Although these situations are rare, it is better that you know about them. So that they are not a shock when they do happen to you.