Traders invest most of their time in planning entry strategies but ending up taking bad exits. Do remember, just like entry trading, exit also matters in stock trading.
Many of us lack in planning effective share trading exit strategies which in turn force us to leave the stock market at the worst possible price.
There are bundles of questions that revolve in our minds while online trading. For instance, people don’t know how to deal with the fear of missing out. Do they think what happens if the scrip goes up after I sell?
The question often circulates in the mind of retail investors. If you are the one who has many doubts about exit trading, we have got you covered.
Before getting started, let’s take a quick tour of the holding period i.e why the holding period is so important and how it plays an important role in the successful exit strategies.
Holding Periods
It’s impossible to discuss exit strategies without explaining holding periods. The holding period is the duration at which you can hold the stock and sell it after the relevant time. The time frame in the holding period helps you to identify the time you need to extract money from the stock market.
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- Day Trading or Intraday Trading: Minutes to Hours
- Swing Trading: Hours to Days
- Position Trading: Days to Week
- Investment Timing: Week to Month
Here, you need to select the category that aligns most closely with your market because it shows how long you have to book profit or loss. This approach requires strict discipline as some positions perform exceptionally well so that you want to hold them beyond time constraints.
While you can stretch the holding period according to market conditions, don’t forget to take an exit within the time limits. Because such things increase your profitability and stock market trading skills.
Market Timings
Before entering the stock market, it would be ideal to get into the habit of profit and loss and risks associated with it. Try to figure out the next resistance level within the time constraints of your holding period.
Now, try to analyze the point at which you will be proven wrong if the stock prices go against your prediction and hit it. That’s your risk. Now calculate the risk-reward ratio which should be 2:1. If anything less and you should skip the trade, move for a better opportunity.
Signs That Shows to Exit from the Particular Stock
Let’s understand it with an example:
Imagine a situation where you invested in a company called ABC Limited. The price of the stock went high within a few years to touch a level of Rs 700 but started to make a fall and now it is trading at Rs 27 today.
Now, let’s think you did full stock market research in the company ABC limited and you believe the company may show a heavy growth and hence you have decided to stick with the stock even if the prices drop.
So, where did you go wrong? Aren’t, you supposed to buy right, sit tight? The answer is Yes. Yes should do so but this is not the case sometimes.
There are few things you need to ponder that give you an idea: what is the best time to exit from a stock?
1. Fundamentals of a Company are Constantly Changing
Is there any change in the fundamentals of a company that affects a stock’s price?
Check out the quarter performance of the company. If you see any sort of delays in the company’s growth report and the company consistently underperforms, then it’s high time to deeply monitor the company’s fundamentals.
Check the company’s fundamentals for at least 3-4 quarters. Also, check the other parts such as the utilization of a company (if there is any decline) or if the NPA is growing up.
Another important factor to check the company’s performance is Debt. Many stocks now have become multi-baggers only because they have zero or negligible debt. Take a quick tour of the debt to market cap ratio.
The debt to market ratio is a way to measure the debt against the company’s ability to raise capital. If the debt percentage is less, the company’s performance is more stable. If you see the number has increased, it’s high time to exit from the stock.
2. Company’s Involvement in Corporate Governance Issues
Corporate governance issues tell you many things such as how well a company manages its stakeholder relations. Here, as an investor checkout for their disclosure policy, dividend policy, conflict resolution between internal and external shareholders. It’s also important how well the upper management handles these setbacks.
Another important thing to note is: if there has been any legal dispute between the senior authorities that haven’t been resolved yet or if the company suffers a lot where you can see the exit of the senior business leader. These heavily impact the price of scrip and you see it gets down to a greater extent.
3. When the Company becomes Extremely Overvalued in Short Time
Normally, the share price of a fundamentally strong company goes high with time. There are certain cases, where the price of a stock goes too high compared to a very short period. In such circumstances, it would be ideal if you immediately sell the stock and book profit.
What to do After You Sell the Stock?
Many times it happens that after selling a stock, you keep questioning your decisions. This is apt for the investors who have worked with the company for years and get emotionally attached to the company.
The bottom line here is that you are in the stock market only to create wealth and hence you should not have stuck with the emotions. Don’t let your emotions overpower your mind.
Takeaway
Planning an exit strategy is effectively important as an entry into the stock market. Proper exit from stock not only prevents you from huge losses but also helps you to take certain actions on time which will help you in the near future.
See, the stock market always depends on the strategies and therefore a meaningful strategy will lead you to achieve more returns from the stock market.
