Mastering the Art of Trading Around Your Positions
Trading in the Indian stock market can often feel like a roller coaster ride. One day the Nifty 50 is touching all-time highs, and the next day, global cues pull it down by hundreds of points. For many retail investors in India, the traditional approach has always been to buy and hold. However, in a market that is increasingly influenced by global volatility, algorithmic trading, and rapid news cycles, a static approach might not always be the most efficient. This is where the concept of trading around a position comes into play. If you have ever wondered how professional traders manage to stay profitable even when the broad market is sideways, heres how to trade around your core holdings to maximize returns and minimize risk.
What Does It Mean to Trade Around a Position?
To trade around a position means maintaining a long-term core holding in a stock or an index while actively buying and selling smaller portions of that same asset to capitalize on short-term price movements. Instead of selling your entire stake when the market looks shaky, you sell a small percentage at resistance levels and buy it back at support levels. This strategy allows you to lower your average cost of acquisition over time without losing your long-term exposure to a quality company or index fund. For Indian traders, this is particularly useful in volatile sectors like Banking or Information Technology, where stocks like HDFC Bank or Infosys often move in predictable ranges before a major breakout.
The Philosophy of the Core and Satellite Approach
Think of your portfolio as a solar system. Your core position is the sun, the heavy weight that stays in place. Your satellite trades are the planets that move around it. By using this method, you are not just a passive observer of your portfolio’s fluctuations. You are actively working the position. When the market is overextended, you trim the satellite portion. When the market sees a sharp correction, you use the cash generated from previous sales to buy back. This keeps you engaged with the market and helps in managing the psychological stress of a falling portfolio because you have a plan to benefit from the dips.
Identifying Key Levels in the Indian Market
Before you can start trading around, you need to identify the boundaries. In the Indian context, certain levels carry more weight than others. Heres how to trade around these specific price points using technical analysis. Round numbers in the Nifty 50, such as 19,000, 20,000, or 21,000, often act as massive psychological support or resistance zones. Similarly, for individual stocks, the previous month’s high and low are crucial benchmarks. If a stock is trading near its 200-day Moving Average (DMA), it is often considered a value zone for Indian investors, making it an ideal place to add to your core position.
Using Support and Resistance Effectively
Support is the floor where buying interest typically outweighs selling pressure, while resistance is the ceiling where selling starts to dominate. To trade around a position, you must mark these levels on your chart. When a stock like Reliance Industries approaches a well-documented resistance level, you might decide to sell 10 percent of your holding. You are not betting against the company; you are simply acknowledging that the price is likely to take a breather. If the price pulls back to the support zone, you buy that 10 percent back. If it breaks out above resistance, you can choose to re-enter or simply let your remaining 90 percent core position ride the gains.
Heres How to Trade Around News Events and Earnings
India is a news-driven market. From RBI policy announcements to quarterly earnings reports, there is always an event on the horizon that can trigger volatility. Trading around these events requires a disciplined approach. Often, the run-up to an earnings report sees a stock price climbing due to high expectations. This is frequently a good time to trim a small portion of your position. If the results are good but the market has already priced them in, the stock might stay flat or even fall—this is the classic buy the rumor, sell the news phenomenon. By selling a bit before the event, you protect yourself against a post-news slump.
Managing the RBI Policy and Global Cues
The Reserve Bank of India’s stance on interest rates has a direct impact on Nifty Bank and the broader market. When the policy is announced, volatility usually spikes. Experienced traders use this volatility to trade around their index positions. If the market reacts negatively to a hawkish stance, it often creates an intraday dip that is bought into by long-term institutional investors. Recognizing these patterns allows you to add to your position at a discount. Conversely, if there is an irrational spike on good news, it might be the perfect time to book some short-term profits on your satellite trades.
Technical Indicators to Simplify Your Strategy
You do not need a degree in finance to trade around your positions, but you do need a few reliable tools. The Volume Weighted Average Price (VWAP) is one of the most effective indicators for Indian intraday and swing traders. It shows the average price a stock has traded at throughout the day, based on both volume and price. If a stock is trading significantly above its VWAP, it might be overbought for the day, suggesting a good time to trim. If it is below, it might be a temporary value play. Another great tool is the Relative Strength Index (RSI). For most Indian stocks, an RSI above 70 indicates an overbought condition, while an RSI below 30 suggests it is oversold. Trading around these extremes can significantly improve your entry and exit timing.
The Importance of Risk Management
The biggest risk in trading around a position is getting caught on the wrong side of a massive trend. What if you sell a portion at resistance, but the stock gaps up 5 percent the next day and never looks back? This is why you must never trade around with your entire position. The core should remain untouched unless your fundamental thesis for owning the company changes. Only the satellite portion, typically 10 to 20 percent of your total holding, should be used for these tactical moves. Additionally, always use stop losses for your satellite trades. If you buy a dip and the support level breaks, you need to exit that specific trade to prevent a small tactical move from becoming a large, unplanned loss.
Tax Implications in India
It is important to remember that in India, frequent buying and selling has tax consequences. Short-term capital gains (STCG) are currently taxed at a higher rate than long-term capital gains (LTCG). When you trade around a position, the shares you sell are usually treated on a First-In-First-Out (FIFO) basis by the tax authorities. This means you might inadvertently be selling shares you bought years ago, potentially triggering capital gains taxes. Always consult with a tax professional or use modern back-office tools provided by Indian brokers to track your tax liability while executing this strategy.
Developing a Disciplined Mindset
The hardest part of trading around is not the technical analysis; it is the emotional discipline. It requires you to sell when everyone else is greedy and buy when everyone else is fearful. In the Indian retail market, the tendency is often the opposite. People tend to buy more when a stock is hitting upper circuits and panic sell when it hits a lower circuit. To succeed, you must detach yourself from the daily noise of financial news channels and social media tips. Stick to your pre-defined support and resistance levels. Documentation is key—keep a simple journal of why you trimmed or added to a position. This will help you refine your strategy over months and years.
Conclusion: Building Wealth Through Active Management
Trading around a position is a bridge between passive investing and aggressive day trading. It allows you to benefit from the long-term growth of the Indian economy while also taking advantage of the inevitable market fluctuations. By identifying key levels, using indicators like VWAP and RSI, and maintaining a strict core-and-satellite structure, you can enhance your portfolio’s performance. Remember, the goal is not to catch every single swing, but to gradually lower your cost basis and stay emotionally balanced in a volatile market. Start small, pick one or two liquid stocks like those in the Nifty 50, and practice the art of trading around. Over time, these small tactical gains can compound into significant wealth.
Is trading around a position the same as day trading?
No, trading around is a hybrid strategy. While it involves shorter-term trades, the primary goal is to manage and enhance a long-term core position rather than just making quick intraday profits.
How much of my portfolio should I use for trading around?
Most experts suggest using only 10 percent to 20 percent of your total holding in a specific stock for tactical trading. The remaining 80 percent should stay as a core long-term investment.
Does this strategy work for all Indian stocks?
It works best with liquid, large-cap stocks like those in the Nifty 50. Small-cap or illiquid stocks can be dangerous to trade around because they may have large spreads and can hit circuits, making it hard to enter or exit.
What happens if I sell and the stock keeps going up?
This is a common risk. This is why you only sell a small portion. If the stock continues to rise, you still benefit from the 80 percent or 90 percent core position that you did not sell.
