We had asked this question last week. There are many variations to this question. A more obvious one is, which is more difficult, exiting at a profit or exiting at a loss? Another angle on this is, why is it more difficult to reenter a trade that has just been exited?
There are so many questions to be answered. We had originally intended to just stick to the basics. But what we are delighted about is that you asked most of these questions. It is heartening that what started out as a simple query, was given multiple dimensions by fellow Sherus responding to our question. In that sense, you have defined the scope of this article. And we are thrilled to bits. We are going to be addressing each of these angles in a series of articles.
Let's start with simple entry and exit. Let's assume that you are making a fresh trade. Let us assume for simplicity's sake, that the entry will be to buy and the exit, to sell. The theory however holds equally good for initiating a sell trade.
We maintain it is harder to exit than to enter. In other words, it is tougher to sell than to buy. While entering a trade, you have the luxury of picking from a million options. You have the option of waiting and taking your time about it. You may have the money in the bank, but you have the choice of waiting till you are absolutely comfortable about buying.
Enter at will
There are a million reasons that you may have for making or not making a fresh trade. You can wait for the market to turn bullish. You can wait for the fundamentals of the company to become positive. You can wait for the right technical set up. You can wait for the institutions to step in and show you the way. Or wait for the market to come to the strongest support level.
You can even wait for your gut to speak to you and tell you that this trade is the one to fund your daughter's education in the US. You essentially are in no compulsion to buy today. If you miss one opportunity, the next one presents itself almost immediately.
Consult the stars
You even have the choice of being frivolous. You don't need to buy today because you, being superstitious, are worried about that black cat that crossed your path this morning. Or maybe the reason you don't feel like initiating a trade is because you have a lunch date with your girlfriend and you don't want to be thinking about your position while whispering sweet nothings into her ear over soup.
You can wait for the planets to align themselves to your satisfaction, so that your trade has the blessings of the Gods. You may even wait for the auspicious time of the day before you buy. Or you could decide to buy next week. Or next month. Or maybe never again! J Whatever the reason, you don't have to buy.
Sticking your neck out
But having exercised the choice and made a trade, you are committed to it. You no longer have the luxury of ignoring it or turning your back on it. You also no longer have the choice of not taking a decision on it. You have to decide when to exit.
And this decision is always difficult because you are no longer playing by your rules. You are playing by the rules of the market. You now have to start praying that you have read the market right.
And in doing so, you will be amazed at the number of doubts that creep into your mind. The trade that you waited patiently to make, confident that it's a sure shot, will suddenly acquire all kinds of ambiguities. Every bout of selling in the stock will make your palms sweat. Every adverse news report will give you palpitations.
Transfixed
You will notice that you can't take your eyes away from the last traded price for the stock. But you can't get yourself to stop. Your work suffers. Your concentration is shot to hell. You have lost your appetite. And the more money you can't afford to lose, the worse is your condition. You are close to becoming dysfunctional.
You will be faced with all kinds of questions. Should I sell much below the profit target? Should I book the loss and get out? Should I wait for a bounceback to sell on the rally? What if the rally does not come? Should I wait till tomorrow? Should I carry forward the position to the next settlement?
You call your broker. You ask your friends. You re-read the research reports, to see if there is something that you missed. Nothing helps. And then you come to Sharekhan looking for help and you end up reading this. Your confidence is shattered. You are reduced to praying.
Enter very carefully
Which is why, even though it seems like the easiest thing to do, you must put all your time and energy into making the entry decision. Buy into a company whose business you know. Buy it for reasons you understand and are comfortable with. Do not buy it just because somebody asks you to.
Have a good idea of the potential profits you can make on the trade. Make sure the profits are large enough to compensate for the hazzles you will go to. Having done that, define the amount you are willing to lose on the trade. Buy a stock only if the risk-reward ratio makes sense. If it doesn't, wait till the price falls to a level you are comfortable with. Buy because a stock is going up, not because it is going cheap. Usually there are good reasons for it to be going 'cheap'.
The better your buying decisions, the less trouble you will have in dealing with the ambiguities that come with the exit decision.
May you find a 10 bagger every month! J
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