Understanding How To Book Profit In Trading: Generally, while trading or investing in the stock market, exiting a position in the market is as important as timing the point of Entry.

Emotions like greed and fear play a vital part when trying to book a profit in the stock market. Managing these emotions and booking profits at the right time can be crucial to becoming a successful trader and also a trader with longevity.

In this article, we will discuss the key triggers that will help you decide How To Book Profit In Trading at the right time.

What is Profit Booking?

Before jumping into the strategies to book profit, let us understand what profit booking means.

Profit Booking also referred to as profit taking is when individuals liquidate their holdings to cash out the profits on the position that they have entered.

How to book profit in trading?

When it comes to trading, you have to reverse your positions in order to book profit. If you are long, then you need to be short to square off, and vice versa if you are short.

But it is crucial to reverse your position at the right time. You do not want to exit your position too soon nor do you want to hold a falling stock for a long time and incur a loss.

Here are some signals that can help you book profits while trading

  1. When the stock starts losing its momentum in a particular direction, it can be a signal for you to book profit in the stock.

    When you hold a long position in the market, you start noticing that there is an absence of buyers in the stock and the stock is losing momentum at a higher price level, you should book profit in the stock. The vice versa told true when taking a short position in the market
  1. When there is no clear reason for the increase or decrease in the stock price and the returns are larger than expected, it is a good time to book profit in the stock.

  2. Stock liquidity can be another signal that can tell you when to book profits. The factors such as FII cash flows, DII cash flows, and increasing interest rates can affect the liquidity of the stocks.

    Tightening liquidity can be bad for traders irrespective of whether they are long or short in the market. This can be an indicator for you to book profits.

  3. If your trading position overlay exposes your capital to downside risk. You should book profit in the market, as your primary goal must be to protect your capital from unnecessary losses.

How to book profit While Investing?

Here are situations where investors should consider booking profit on their holdings:

  1. When there is news relating to the company: If a piece of positive news relating to the company hits the market, it will result in a lot of people buying the shares of the company.

    This can result in the rise of the share price of the company resulting in the targets of many investors being achieved. This can result in investors selling the shares which can cause a temporary decline in the share price.
  1. When the fundamentals of the company are Deteriorating: If you hold the shares of a good company, but you notice that the performance of the company is deteriorating, you should consider booking profits in the shares of the company.

    The performance of the company can be based on several indicators like the company’s valuation ratio, quarterly earnings, the balance sheet of the company, and so on. Sometimes Macroeconomic scenarios might also play a big part in exiting your positions in the company.
  1. Economic Indicators: The information relating to the economic data can also impact the price of the share. Suppose the economic outlook of the company is not positive, it can result in investors selling off their investments given the bleak future opportunities.

Example: Towards the end of December 2019, the Nifty 50 was around trading 12,000-12,500 levels. While nifty was making new highs, news came out that the GDP growth of India has slowed down to 4.7% and that the economy was not performing well.

This caused nifty to lose around 30-35% in a quick span and it was trading around 8000 levels. And which had an impact on all the sectors and their constituents and eroded a lot of wealth. 

In such scenarios, it is advised that one should analyze their portfolio and liquidate a part of it, and renter when the economic climate becomes more favourable. 

Also Read: How to Calculate Profit in Options Trading?

In Closing

In this article, we discussed what is profit booking and How To Book Profit In Trading & investing.

Every position has to be exited at some point in the market. Booking profits at the right time can help individuals maximize their profits in the stock market. Thus it is important for an individual to understand the right time to book a profit in the stock market.

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