Just bought a stock? Here is how to devise an exit strategy

William O'Neil India

After entering a perfect growth stock with promising fundamentals, it becomes even more crucial to book your healthy gains before it washes away. After a stock gives you 10 percent, 15 percent, or 20 percent within few weeks, it becomes difficult to decide whether to exit the stock profitably or keep holding the stock as an up-trending momentum may give you further profits.

Here are some of the rules, based on extensive back-testing done on ~100 years of stock market history, which you can follow to guide yourself in such scenarios:

1. After making 20–25 percent from a correct buy point (proper breakout from pivot level), most stocks retreat. It is a good time to book your profit, given it took time to reach that level (more than three weeks) and/or the base it rallied from was second-stage or later base. Stocks breaking out from third and higher stage bases have strong chances of failures.

2. If a stock gives you 20 percent or more return in less than three weeks after the breakout, it shows rare strength and eight-week-hold rule triggers. Under this, you hold the stock at least for eight weeks. Such stocks usually end up giving multi-fold returns.

3. If the stock moves in your favour in an erratic manner; for example, a stock shows unexplained intra-day volatility, moves down but ends higher giving you the gains, it is a negative signal. Such stock is likely to move against your position and should be sold.

4. If recently you have taken 7–8 percent loss in one of your positions, it is prudent to take your profits at 20–25 percent levels, or at least trail your profits from that level. However, if you have taken several 7–8 percent losses, and none of your recent picks has hit the level of 20–25 percent breakout from pivot level, you need to change your strategy.

You may consider booking profits earlier than 20–25 percent to cover up losses in your capital. But more importantly, you should re-examine your stock selections, and characteristics of your breakouts/buy signals. You must also re-examine the overall market direction, and try to steer clear if the market is not in a confirmed uptrend.