Nifty Update: Profit booking

Significance of Profit Booking

and Partial Profit Booking.

Ever since 2006, in my career as a Trader , Analyst and Teacher, many people have asked why should i make multiple lots position at the time of entry ? Why should one do partial profit booking ? Why is it required when one is following technicals and can exit at one time only ?

Trading in Stock(s), Indices, Commodities or any other trade-able financial instrument is not only about putting your money into your trading a/c and start trading. But its more about keeping your capital safe and increasing.

Any business or work, which one wishes to take up as a career , should be first learnt by him through books and then one must gain experience by working under a mentor who could enlighten his path.

When it comes to trading through Technical Analysis, one not only require trading capital but even more important pre-requisites are discipline, patience and other psychological factors which can ruin one's career as a Trader. By physiological factors i mean those factors which can damage your mental framework.

And hence one needs to built up his own Trading System, whereby he defines a set of rules for Entry, Exit , Profit Booking and Stop Loss. So that the mental damage and pain one experiences as a result of his unfulfilled expectations are kept aside. Two most important factors one should keep in mind, while building a Trading System, are

1) It must suit his style of Trading and
2) It must suit his life-style.

So that he can devote the required time to the market. In this way, one can introspect and break down the disparity between an actual mindset required for trading and his mythical horizons and illusions.

Being honest, in my early days after learning Technical Analysis, i visited a few brokers in New Delhi ( though i would not name anyone), as they had a team of Analyst, carrying books of TA and my laptop on my back, just to request them to keep me as a Trainee. I was ready to work for free but to no avail as none of them agreed to it. Then an idea struck in my mind that i have my trading account with a few brokers and they give calls (intra-day or positional), based on Technical Research and even print their research magazines. I decided to monitor those calls and tried to find out what could be the possible reason to give those calls. With time i found that most of them were loss making calls. I started calling their analyst , spoke to them over the phone but again to no avail. This persuaded me to visit a very well known broker in New Delhi ( again i would not name), took the data of his calls majority of which were wrong, and asked them to make me meet the analyst so that i could know what he saw in the chart that convinced him to give that call. The research head of that broker instead tried to prove me wrong. Even more astonishing was the fact that all these brokers had a few analyst but none of them had a trader. Even worse, that none of those analyst was ready to become a trader.

That was a well defining moment of my life, when i was fully convinced that these brokers and their mindset of just to make brokerage for themselves is the root cause of the tarnished image of stock market in our country. This is one of the major reasons why a common man still thinks that their is no significance of any research and stock market is only a gamble.

But in the books of accounts, debit and credit are always equal. That means that the amount of loss made by one set of people is equal to profit made by other. In stock market, only 5% - 10% of the people earn what nearly 90% loose. So their has to be a definite reason why they loose and why they earn. I found that apart from those who have some inside information its only an Analyst who can earn from the market. But he is also prone to make losses if he does not have a proper and wisely chosen system of trading. However, this does not imply that every trade made by an analyst will be profitable. If one would be so sure then their was no need of keeping a Stop Loss. This only means that even after having loss making trades the analyst will be in net gain and have a respectable return on investment.

And hence, i started developing my own ideas of making a Trading System and with time realized that a good trading system should have a proper entry, re-entry , partial profit booking ,fully exit, stop loss and / or building up reverse positions levels. Out of all these pre-requisites the exit and partial profit booking levels in a system are the most important ones, as these are the levels which would decide your P&L. Also, once you decide your protocols for entry, with experience one would realize that he can still add filters to it and hence avoid a few loss making trades. This would eventually increase his profits and reduce the number of trades.

When we invest our money and if we get some profit we are not sure what can happen next, we book a part of it to minimize our risk . The main idea here is that if we gain some profits , we should book some part of it to make sure that we already got that profit in hand and not just in mind.

When you have opened a trade and is in the positive territory, you have a number of options. One, you can decide to close the trade and lock-up the profits. Alternatively, you can let the trade continue to run until it reaches your preferred place. Also, you have the option to take your profits and let the trade run. Each of these options has advantages and disadvantages. The advantage of closing the trade is that you are secure. You have made your money. The disadvantage is when you find that you would have made money if you hadn’t closed the trade. Not a bad decision though. The advantage of letting it run is that there could be more profitable direction to the trade. The disadvantage is that there could be a reversal that will lead to your profits being squeezed. The advantage of partial profit taking is that it secures your account in such a way that even when there is a reversal, you will still have the money you took.

Now look at the charts and trade report below.

Notice, the numerous buy sell signals generated in the range bound market. This is where comes the significance of adding entry filters and partial profit booking. Count the total number of signals in the chart and compare it with the actual trades taken due to entry filters. See, the net result in the report book and you will find how partial profit booking kept your account positive. Notice the points earned per lot on the two partial profit booking levels compared to the points on final exit. What would have been the result if a person was trading on entry and exit levels only as compared to one trading with partial profit booking.

And the final figure(s) explains it all by itself.

Bank Nifty Strategy Chart.