Market at record highs, deploy exposure management strategy to maximize returns  

Apart from picking the right stocks, exposure management plays an important role in the overall returns achieved. It is advised to increase exposure to winners and reduce losing stocks.

A sound exposure management strategy not only curtails risk but also keeps you aggressively invested when the chances of gains are high.

However, it only works well in the long run if the strategy is rule-based. CANSLIM provides a perfect objective system which is summarised below:

1. Never invest all your capital at once or on a particular stock. Divide the capital allocation into three to four steps. Start with 30-40 percent investment and keep increasing positions as the market moves upward to the maximum of 100 percent.

2. Use market signals to increase or decrease your exposure in the overall market. One of the “buy” signals is an additional follow-thorough day. When the market is in an uptrend, increase your exposure on every additional follow-through day

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Mayuresh Joshi

Head of Research – Equity|William O’Neil India

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3. Reduce your market exposure if the index breaches key moving averages (50-day moving average (DMA) and 200-DMA with heavy volume). Also, reduce your positions, one step at a time, if distribution days occur in a cluster. More than three distribution days in an eight-day window is one such signal.

4. Factor in the market status for successful exposure management. Increase your exposure toward the market if it is in a confirmed uptrend. Start reducing if the market status is downgraded to an uptrend under pressure. Minimise exposure or exit if the market is in a downtrend. Start increasing positions if it is in a rally attempt.

5. For individual stocks, if already in profit, use pyramiding strategy—always average on the way up, never on the way down. Increase your positions whenever a stock that had a successful breakout retakes or rebounds from one of the key moving averages (50- or 200-DMA) after a shakeout.

For a stock-specific alternative buy point, take the case of Balkrishna Industries. After a successful breakout, it exhibited a shakeout but rebounded from its 50-DMA. This was the legitimate point to increase positions.

(The author is Head of Research – Equity, William O’Neil India)

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