Targets in Trading

Targets can be of 3 types

1. Time-based—I will hold my Positions for a X amount of time Say 1 week depending on the type of trader/Investor.
2. Technically-based – You get your targets technically set up. You can use Pivots, Exponetioanl Moving Average, and MA or based on your trading system.
3. Price/Profit-based –I’ll get out when I have an open profit of Rs 10K or when trade when it reaches target price

All 3 methods discussed above have their own pros and cons.
Time Based can never be used as a Solo tool as we are in a globalized world and markets gets affected by turn of events thought out the world and we can be wiped off the market if some disaster happens.
Technical exit works extremely well when markets are in a strong trend but fails when we have a range bound or congestion market like one we are having now in Nifty. Bears and bulls both are at losing end as Nifty is trading in such a small range.
Profit and Price Based Exits can force a trader/Investor to exit when the Stock/market has just started its bull run and Person can be left just scratching their heads why the stock moves after I exit. This is the same story of most of the traders/Investor.(Correct me if I am wrong J)

Best Strategy to Exit

The best exit strategy is to set price targets which are make sense based on market structure and reflects market existing support and resistance. If you trade plan takes into market support and resistance on all time frame i.e. Hourly,Daily,Weekly and Monthly your changes of taking what all market offers will be far and far higher if your trading is emotionally driven i.e. Fixed Profit or Technically Driven which let you keep lots of money left on the table.

Rebalance your portfolio periodically to retain its risk and returns

Seasoned investors can vouch for the fact that the key to maintaining a good portfolio mix is periodic portfolio rebalancing. Rebalancing helps in maintaining the portfolio's original risk-return characteristics.

Asset allocation strategy is crucial to building a strong portfolio. It determines the proportion of any given asset class represented in your portfolio. An older and risk-averse investor has a retirement asset allocation of predominantly fixed income investments. A young and aggressive investor will have the bulk of his money in the stock markets. In a nutshell, a portfolio's asset allocation strategy determines its risk and returns characteristics.

What happens to the original asset allocation when one asset class yields phenomenal returns while others pale out? As different asset classes give different returns, a portfolio's asset allocation changes considerably with time. It is essential to retain the original risk and returns characteristics of a portfolio. Investors can rebalance by buying and selling portions of their assets in order to regain the weight of each asset class back to its original proportion.

Time to rebalance portfolio

When should an investor balance his portfolio? The characteristics of the portfolio's assets determine the frequency of rebalancing. If there is a high correlation among the returns of a portfolio's various assets, the performance of assets under the given market conditions will be similar. This significantly reduces the likelihood of the portfolio drifting from target allocation, and hence such a portfolio has little need for rebalancing.

Rebalancing becomes critical under these circumstances:


• It is time to rebalance the portfolio when some of your investments become out of alignment with your goals

• Your portfolio loses its original asset allocation proportion when some asset classes become over-represented

• If your risk profile has changed

• When an asset class makes a significant profit or loss

• Another strategy is to periodically rebalance the portfolio - say once every six months

Strategies to rebalance portfolio

How can you rebalance your portfolio? There are three strategies for rebalancing a portfolio that has strayed away from the original asset allocation mix. The most common strategy is to sell star performing stocks and reinvest the profits in debt instruments to regain the original equity-to-debt ratio.

Most investors hesitate to rebalance at a time when the stock markets are yielding lucrative results. Rebalancing is essential to maintain the risk level of your portfolio.

Another strategy is to weed out under-performers from your stock basket and reinvest the money in bonds or cash. This way, you can also get rid of risky stocks that are worthless.

If you have surplus money, you can make fresh investments and raise the percentage level of asset classes that have trimmed down.

Portfolio rebalancing helps maintain an acceptable level of risk, and in times of turbulence, will prevent gross erosion of portfolio value.

Avoid frequent churning

When implementing a rebalancing strategy, do not forget to factor in time spent, redemption fees and trading costs. These expenses will reduce the returns from the portfolio. Hence, rebalancing too frequently is not advisable.

CASE STUDY

Mr.INVESTOR has invested Rs 10 lakhs in stocks and bonds. Since his risk appetite level is medium, he has invested 50 percent of his money in stocks and 50 percent in bonds. In the bull run, the representation of stocks in the portfolio went up to 70 percent. His original investment of Rs 5 lakhs in stocks grew to Rs. 12 lakhs. His investments in bonds moved up marginally to 30 percent at Rs 8 lakhs.

The portfolio has churned out to be quite risky with excessive exposure to equity. Mr.INVESTOR can sell 20 percent of his stock portfolio that have fared well and use those proceeds to invest in bonds to reset the original equity-debt allocation ratio.

  After rebalancing this way, the equity-to-debt ratio has come back to 50:50 at Rs 10 lakhs each.

If Mr.INVESTOR hesitates to sell stocks performing well, he can explore investing more money in bonds to regain the original asset proportion.

Consequences of not rebalancing this portfolio

What happens if Mr.INVESTOR does not rebalance his portfolio? Assuming that during the bull run Mr.INVESTOR's portfolio has an equity exposure of 85 percent, only 15 percent of his portfolio is invested in more stable and less risky debt instruments. Assume after a few months, the stock market bubble bursts and a bear market ensues. The incessant selling in the markets plunges investors into gloom.

Consider a scenario when the crumbling market pulls down Mr.INVESTOR's equity holdings to peanuts. With his debt exposure already at a dismal 15 percent, Mr.INVESTOR has no safety net to fall back on in these troubled times.