booking profit and trailing stoploss

i have this standard profit booking rule for intraday or overnight nifty trades with in-the-money options:

one third lots booking@25 points,

one third lots @40 points

and balance flexible.

once a target is crossed, previous target becomes trailing stop loss for the balance lots.

trailing stop loss for balance lots after crossing first target is the entry point.

discussion on "diamond rule of booking profit"

thank u all for the healthy and enriched discussion (http://www.mudraa.com/trading/104685/0/diamond-rule-of-booking-profit-js.html) which sometimes i desperately miss despite knowing that we have a lot of sharp, experienced and fiercely talented minds in mudraa

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i would like to share my views one by one on what has been opined here

dear mr.arora,
u said


"Dear JS
I have tried this method several times.It does not work well.What if the market is struck in a range for next few days or reverses.Suppose you square a call at 200 with a put at 100 and in next few days both become half,your profit will shrink to half as mostly happens.You cannot decide optimum point at which you will book your call as Nifty has its own ways.
suppose your call at 200 becomes 150 next day and languishes there for a long time ,as sson as it touches 180 you would be tempted to book and curtail your loss,and lo it would soon touch 250 leaving you repentful."
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dear mr.arora,
u r right
but i think i need to clarify a few things about this rule.
1. if the market gets stuck in a range after we "book profit" the way i shared above? = well, if you see the rally pausing, why not square off totally!
"don't catch a falling knife" we say during bear runs or sell-offs.
similarly, we can say "don't catch a rising spike"
but what if the knife has stopped falling and the spike stopped rising?
there is no harm in that case.
as u said, if the market enters range after we take reverse option position, then who stops us from winding up everything especially when we are sure that the rally has stopped or ended or paused for the time being and that we will not lose potential profit by squaring-off prematurely!
2. if the market reverses, the reverse option position will soon gain as much as u will lose - the only condition being that u buy at-the-money or in-the-money option and not out-of-money option. i have noticed that majority of the opinions shared in this thread are based on fears caused by "out-of-money" positions.
3. as far as judging the appropriate time to "book-profit" is concerned, i beg to state that while it may not be possible to exactly pinpoint the moment, it will be suffice to judge it approximately. this rule is actually a strategy which can take care of the gaps in timing. no timing is better than rough timing.

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dear hvm
u said

"I feel if the underlying secuirty is volatile than these strategy would work.
Further, taking JS example, when gain from Call value exceeds the Put premium than one sell off the Call Option and wait for Put option to sell when Bank nifty comes down."

--

hvm, u r right, this rule helps when the rocket is still moving but we have fear or indication of it falling.
but i somehow don't agree ur second line (or i have not got u) = e.g. during upmoves, when the call still keeps moving up and the benefit from its rise exceeds the loss from the put's decline (with which we "booked profit"), even then don't square-off the call. this rule applied then also. this is a multiple stage rule. who knows it may be a big big rally and may continue to go. at that time we should again buy a at-the-money put of new cmp.
i think everyone still remembers the rally of may 2010 when the nifty went 1000+ points in a single rally. had we known this rule we could have minted money.


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alkaji
u said
"sir insted of buying an option...can we short sell option.... consider... if i bought 4900ce when nifty was trading at 4925 n when it came to 5000..insted of buying 5000pe ..wouldn't be it better to write 5000ce insted... coz if mkt remain range bound..  value of option will become less day by day.....hence we will gain anyway.... 
also u mention that operators do short sell but with proper hedging...... just my view... plz gide!!"

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alkaji, i don't agree that we should short sell option.....................the reason = if the rally continues further, we would lose in the short sell. the beauty of the reverse option is that if the rally continues, the reverse options evaporates soon.
we can counter the fear of losing premium in case of range-bound market by actually winding up everything (as i said while replying to mr.arora)

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dear sv
u said"Future of this month long and next month short/ this month short and next month long?
Can also be used as hedging straregy.
Comments please."

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dear sv,
hedging future with future is a "rahul dravid" patience strategy and one is likely to get it wrong many times. also, it is recommended only during down runs.
otherwise, hedging future with future is like writing ur own cheque in your name. we want others' cheques in our name.
future against future is a safe game but it goes nowhere......it is too safe. why not square-off actually if we are to do this.
if at all u do that u need to pitch a different future (stock or index) against original future........but it is complicated and slippery."

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dear sim,
u saidthis rule I tried, but in reverse order, when my SL Hit I hedge it with another one at the money,,,,  BUT now the Loss is fixed and the profit on one can be booked at the swing"what we end up is we book the profit leg and wait for opportunity on the loss leg holding it,, we should have a mind set to close both together!"

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dear sim,
in reverse, an "ON" will become "NO". this rule is only for "booking profit" but not for "booking loss". may be i will chalk out one for that condition.
when u book loss with a reverse option, ur original option is already in-the-money. in that case, if things still go in the same direction, ur profit with new option will be less than ur loss with the original one.
if u see this rule with opposite lens, it will give opposite inference.

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diamond rule of booking profit

never book profit by squaring off

book profit by taking reverse at-the-money option.

whether your decision turns right or wrong, you will profit.




let me give an example which is the reason behind my coming out with this rule
i bought 9000call of bank nifty.
bank nifty came to 9330 and as indicated my my trading method, i booked profit by squaring off the call.
had i waited i would have profited as the bank nifty went to 9500.
but instead of squaring off the call had i taken an at-the-money put option (9300 put) and held on to 9000call, i would have lost 50 points in 9300put and got 140+ points more in 9000call - a clean profit of 90+ points.
i have figured out the reverse scenario as well.
i am thrilled with this rule, this rule is my take-away for the day. it has costed my just 1250 per lot.
this rule has many applications with profound practical implications.

consistency

you can't be 

consistently profitable

in trading!

but you can

definitely be

consistently net-profitable

in trading!!!

and that

should be

your aim.

trading essentials - I

"being wrong is acceptable.

but staying wrong is totally unacceptable.

being wrong isn’t a choice,

but staying wrong is.

to play any game successfully,

you have to have some skill,

an edge,

but beyond that it is money management.

good traders manage the downside;

they don’t worry the upside."


- mark minervini

the art of booking loss & profit!

traders are great athletes as well as great spectators!

when they run

they are a treat to watch........running like an obsessed creature....full of fear!

like a fugitive involved in a hit and run case!



and when they are not running

they are great spectators

cursing themselves as to why they are not in the race!



there are 4 types of trade athletes!



1. those who cut short their profitable runs but don't honour the stop loss hits

= typical newcomer unevolved trainee trader driven by 'fear of booked loss' and 'fear of loss of profit'. still, a good, necessary and inevitable phase for any new citizen of the market.

2. those who cut short their profitable runs but also honour the stop loss hits

= the first conscious effort of the budding trader. though he still can't overcome the fear of loss of profit, he definitely doesn't fear booking the loss. they keep ringing their piggy bank with coins till one mistake gets the better of them. such traders are less as this is more of an ideal state of a trainee mind.

3. those who not only let their profitable trades run but also don't honour their stop loss hits

= a wealthy newcomer who has got skin thick enough to bear the loss of accrued profit but not thick enough to accept that his calculation can go wrong. they win big and lose it all.....and finally blame the market.

4. those who let their profitable trades run till indication of trend reversal but honour their stop loss hits.

= matured seasoned silent emotionless egoless boring money machines. this stage comes with time but does come.

pitcher of profit!

a successful trader was very upset with himself
and his friends and fellow traders didn't know why!

"you are much more successful in trading than we are
then why are you always melancholic?" they asked him

"today, the market moved up and down three times
and covered a total distance of 85 points.
and look what i got.....just 34!
i missed 51 points!!
yesterday also the same thing happened.
i could get only 23 points out of 47 possible!
don't you think this is enough reason to be unhappy about!"
explained the sad trader.

--

day after day
week after week
the trader kept gaining points
but the worry lines on his forehead kept getting deeper and darker!

--

one friday
after trading hours
he packed his bag
kicked start his bike
and rode straight out of the town
to his native village
on the bank of river dausa.

--

his grandparents noted the tension
written all over once-radiant face of their grand child!
"what's the matter, son!" asked his grandfather who had himself been
a successful fruit trader in his life!

the trader shared his dilemma.

"don't worry about it! everything gonnabe ok!"
the grandfather consoled him.

--

next morning
the grandpa woke up early
went to his grandson's room
and asked
"would you like to come with me for a walk to the river!"

the trader was not interested
"no, grandpa, i don't wish to!"

"you will feel better, son!"
the grandpa tried again.

the trader desperately wanted to feel better.
so, this logic appealed to him.

he reluctantly got out of the bed
freshened up
and joined his grandpa.

both walked all the way to the river.

it was very early in the morning
and the view was breath-taking.

the cool breeze by the river had a soothing effect on the young prodigal trader!

and then

suddenly

the youngman saw something
which shook him big!

he saw the village ladies
go to the river bank,
fill their earthern pitchers with water
put the pitchers on their head
and walk away
smiling and singing!

what struck him was
that the ladies
had not insisted on
or worried about
carrying the entire river
alongwith them.

the ladies knew that river was gushing with huge discharge of water
but they knew their own storing capacity
they knew their carrying capacity
they knew their requirement!

they were happy with pitcher-ful of water!
every lady was carrying a pitcher they could afford
small, big, very big
but none was carrying a pitcher which could suck in the entire river

besides, they also knew that
river will not stop running
and that
they will be back
the next day!

the trader got the message.

"it is not important whether you take home the entire rive of profits

whats important is whether you have filled your pitcher of ability!"

his face suddenly got lit with the radiance
which he once had!

he looked towards his grandfather
the old man knew what his talented grandson had learnt!

both smiled
held each others' hands
and walked back home....

with the trader anxious to hear the opening bell ring on monday!