Exits

Exiting a name should only take place when you know the money can be deployed better elsewhere. If a stock is profitable in your portfolio, why would you discard it? The way the market moves is usually base, rally, base, rally and so on till a climax isn’t reached. The best way to ride a monster is to trail a stoploss- a point where you know that the hypothesis that made you buy the stock has been disproved.

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In actual practice though, you will find a lot of stocks which immediately move in the days that follow your entry to the point that you may be sitting on a neat 25 to 30 % gain from your entry. These sort of parabolic gains should almost always be locked in since a correction would inevitably be due.

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You must allow the price to move 1R from your entry first before you think of exiting the stock. It’s a prudent way of ensuring that you’re giving your investment time to work.

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The most objective exits that we have used is the 8 day moving average for pure momentum plays and 20 day moving average for base breakouts. A one day or two days of prices closing t below the respective moving average price usually signals waning momentum.

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If the stock however reverses immediately after you enter, take it on the chin and exit using a stoploss order. If you’re following efficient risk management, the loss shouldn’t hurt. Do note that you can re-enter if the stock sets up again but for the time being, the market has proved you wrong, so don’t fight further.