Everyone knows that investing is buying shares at the low price and selling it at the high price. But everyone forgets that it is not possible consistently, and practically not possible to time the market.
Emotions sway our judgments, and we cannot take losses easily. Losses not only bring us financially down but also hurt our egos. Though every time we sell our stocks which have appreciated in value and book profit, but whenever the stocks dive we hold on to it thinking that it will appreciate sufficiently and we will not incur any loss (and neither profit), this way we wait and then come to know that our returns are not even the fraction of our purchase value. You can see there are many benefits of intraday trade
This situation can be virtually avoided or loss impact can be lessened. The best way is to trade in a disciplined way and adopt profit/loss plan. We will discuss a strategy of this profit/loss plan.
- Introduction to profit/loss plan
Profit/loss plan is overlooked by most of the investors and day traders. It sets the upper gain limit and lower loss limit. In other words, the upper limit is maximum gain and the lower limit is the maximum loss (usually called stop loss) an investor can withstand. Limiting the losses is a very important part for an investor which has an effect on overall portfolio and hence this plan is one of a crucial part while making a sound investment strategy.
Everyone (including professional investors) make mistake while picking up a stock and lose money. But experienced investors have the ability to recognize their mistake, and learn from their mistake, for their future stock picking.
Profit/loss plan helps you to separate your emotions from your investing strategy, once you recognized your mistake. If you are not too possessive (emotional) of your gains and see to it as increasing your cash flow you will not be sad of your losses and therefore you can control them. A proverb in this context goes like this “be neither proud of your success nor sad of your defeat”.
- Planning your profit/loss plan
First and the foremost thing one should set a limit of maximum gain, and maximum loss that you can withstand for your investment. This maximum and the minimum limit will vary from stock to stock. Say for large caps (which are less volatile) it can be 10 percent (gain and loss) in a year, and for small caps, you can keep 20 – 25 percent gain and 10 percent loss limit. Similarly, you can limit for mid caps too. Each stock should be analyzed on an individual basis. Go through Indian stock market overview to know what range is large, mid and small caps are.
One can also take into account the designated performance benchmark for each stock by going through their past performance or index. Your risk tolerance factor should also be taken into account while devising the plan. Are you risk averse or risk lover? Accordingly, you set your loss limit.
- Plan Execution
Once you have decided on your gain and loss limits, you have to put your plan into action. Remember you have to sell your stock once it has reached upper or lower limit. A double requirement. Certain brokers will not take two different sell orders for the same script. So the best thing is to trigger sale order once it reaches your stop loss threshold. This ensures that you do not burn a large hole in your pocket. Now if the price appreciates to the upper limit, just change the price of your stop loss order, which in turn activate immediate sale of your stock.
Try to stick to your proposed plan. You will get a heartache that once you sell your stock at the upper limit and share prices keep increasing, but it will be better to sell stock on their way up than to wait and dump stock when the price collapse after its peak. This is a way to make money in Indian stock market.