Tuesday, July 1, 2008

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Progressive Reduction of Portfolio: A Successful Exit Strategy

One of the reasons why I consider stock trading to give returns always is because of the pyramiding approach. It is similar to averaging. Instead of buying as the stock goes down to average down the buying price, we buy the stock as it goes up to increase the profits. Strange it may seem, but it needs clever brains to understand why it is good in the long run.

We can do same thing while selling stocks. As it is tough to decide when to sell all holdings, we sell some if markets fall by some amount. Sell some more if again the market falls by some more. Keep doing it with three or four divisions of stock. By then all stock should have been sold out. That ensures that we reduce losses and get out only if it were to go down and also eliminates fear/indecision due to uncertainty at the cost of certain real loss.

I did the same this time around. I was about to do pyramiding while buying on Thursday but the orders didn’t get through as the market was not going up any more after I bought first. This was unfortunate and mistake on my part to consider the FnO settlement day. This a surely bad day to initiate positions.

I closed my positions progressively as I started feeling pain. It is ok to see stocks going up when we are in. But not seeing them down. I felt the pain because I consider the losses as real immediately as they appear on the paper. When I looked at US markets on Saturday, falling down again by 1% I felt bad. But after realizing that I sold half of my holdings, I got relieved. I thought, even if hell breaks lose on Monday, I will not lose much as around 25-30% of my portfolio is in the market. That became true as I lost only 5% of this amount while the mid cap index fell by 4% and many hot stocks fell by nearly 10%. I got out of all stock except a 6% of total capital is still at risk.

This is a great way to reduce your stock if you are uncertain about market direction. This works pretty well in both directions and employed by all institutions/funds because they have no other choice. For a day trader, this is a great armor in his continuous struggle for both regular profits and survival. It can happen that the stock immediately changes the direction after we finish this process. We should not worry with that because those are the scenarios that put poison into our decision making process. It takes many such scenarios to turn any person into profitable stock trader. That is the reason why it is better to trade actively with different techniques even with lesser capital to sharpen our trading edge.

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