Determination of Profit Targets

Let’s use a Zerodha account as an example to determine profit targets. If you have an account with a different brokerage or if charges change in the future, adjust your targets accordingly.

Suppose you have a capital of 25,000 rupees and you buy stocks for 1,000 rupees using a Zerodha account. There's no brokerage fee at the time of purchase, only STT and GST amounting to about one rupee. When the stock is sold, a 16 rupee delivery charge and one rupee in taxes are applied. Thus, buying and selling stocks for 1,000 rupees costs around 20 rupees, including a 15% short-term capital gains tax on profit. You can also save on this tax, which will be discussed under the income tax harvesting tip later.

If you book a 4.5% profit on 1,000 rupees, i.e., 45 rupees, you end up with only about 25 rupees as profit, translating to a 2.5% net return. Similarly, if you book a 4% profit on your next investment of 2,000 rupees, 30 rupees would be reduced for charges. Thus, out of  80rupees (4% of 2,000rupees), if you deduct 30 rupees for costs, you’re left with 50rupees or a 2.5% net return. If you book a 3.5% profit on 3,000rupees, you get 105 rupees and after deducting around 40rupees for costs, you're left with 75rupees as net profit. For an investment of 4,000rupees, booking a 3% profit would provide a net return of around 2.5% after costs.

Suppose you can't book a profit even after averaging out four times, i.e., averaging for four consecutive weeks. In that case, revise the profit target to 2.5% after averaging out the fifth time, resulting in an investment of 5,000rupees. If the investment amount rises to 6,000rupees, revise the profit target to 2%. After averaging out seven times, set the target at 1.5%. If a profit isn’t booked even after that, lower the target to 1% after averaging out for the eighth time.

If your stock is very weak and you don’t get a return of even 1% after averaging out eight times, maintain a minimum profit target of 0.5% after averaging out the ninth time or any subsequent times.

After averaging out nine times, your investment in the stock goes up to 9,000rupees. Exiting with 0.5% of 9,000rupees, i.e., 45rupees, is low, but after adjusting delivery charges and other costs, you can exit at 'no profit loss.'

Reaching a 0.5% profit is quite easy. For example, if your average price is 45rupees, even exiting at 45.23rupees meets a 0.5% profit target. This is beneficial because most of your swing trades will achieve 4.5% to 2.5% profit. A situation requiring a 0.5% profit is rare and arises only during a major stock downturn or prolonged bear market. However, this situation has four advantages:

1. Your core capital of 9,000rupees gets released for fresh swing trades.
2. After adjusting a 16 rupees delivery charge and other expenses of 18 rupees, you’re left with 11 rupees net profit. You don’t exit with a loss, providing mental satisfaction and avoiding being stuck with a specific stock.
3. You can earn profit by using this capital for fresh swing trades, while other traders might remain tied to falling stocks, eroding their capital. Here, you get a chance to exit within two months.
4. You can select a new stock after exiting a stock that has been falling for nine weeks. If you decide to swing trade the same stock, it would have dropped significantly. When you reinvest 1,000rupees in that stock, you could get a 4.5% return.

There's no need to panic.