Here is how to book profits on your stock trades like a PRO — explained with a real-time stock trade using our WIBE 3V Strategy!
Trading and Investing are akin to one another — except that the holding period of an investment vehicle varies.
Investing — People hold on to assets for a relatively long time (a few years to decades) — Staying invested.
Trading — People hold on to assets for a relatively shorter time frame (a few hours to weeks/months) — after that, they exit the investment vehicle by booking profits or a loss!
Regarding trading, it is essential to book profits when the assets reach a pre-determined profit percentage (or) as per the strategy (or) exit the trade at a loss when it hits a stop loss.
Here is a real-time scenario where we booked profits on one of our recent stock picks based on the WIBE 3V Strategy.
Stock Ticker: NSE:MRPL
Company: Mangalore Refinery & Petrochemical Ltd
Buy Date: 31st May 2022
Buy Price: INR 80.9
The stock has gained about 57% from its buy price of INR 80.9
According to the WIBE 3V Strategy, the stock was a BUY on 5th April 2022. Users of the WIBE 3V Strategy would have amassed an enormous profit on this trade by 120% in 45 days.
How to Book Profits Like a Pro?
Since the stock has rallied by 57% from the purchase price of INR 81, it is essential to book profits. Traders generally use the Risk to Reward Ratio (RRR); once the target is achieved, the position is closed. However, the Risk to Reward ratio may not hold well for all trading strategies; for example, a simple trend-following or the innovative WIBE 3V Strategy may not follow a Risk-Reward Ratio. Traders will continue to hold the positions until a SELL signal arises.
Traders can book profits in three ways:
- Sell a part of their positions for a profit and to readjust to the original allocation
- Sell a part of their positions when a particular profit % is achieved
- Adjust the stop loss based on the stock price movements
In this blog, let me explain the first method by which traders can book profits on their existing stock positions.
Booking Profits — Method 1:
Let’s say the original investment value on the position (MRPL) is One lakh (INR 1,00,000). The investment has grown by 57%, and thus, the notional value (unrealized value) of the position is one lakh and fifty-seven thousand (INR 1,57,000). The stock was bought at INR 80.9; you have 1236 shares of MRPL.
One of the easiest methods to book profits is to sell some shares in value equivalent to the gains achieved. In this case, the total notional profit is about INR 48,331. Traders can sell about 403 shares of MRPL at INR 120 to book profits of INR 48,360 (taxes neglected).
By this, traders stay assured that the notional profits are converted to real gains, such that actual cash is back in their trading account. Traders can continue to ride the position until the WIBE 3V Strategy issues the “SELL” signal. In the above case, out of 1236 shares, traders would have booked profits by selling 403 shares and continue to ride the position with 833 shares.
Note that there are multiple methods to book profits out of which I love to stick with three simple ways. Watch out for the next blog where I will be explaining the other two methods.
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Do your due diligence if or when placing a trade/investing. All ideas stated here are my own and do not represent trading or investment advice.