>>> Any general rules? Do you add to a trade which is off to a good start OR open a new position? <<<
It depends.
Some traders will add to a position as soon as it is up 3%. This still provides them with a good reward to risk ratio on a trade that is up immediately for them, and they are still buying it close to a support level.
I add to a position after I have already sold 1/2 of my position at the first profit target and the stock presents another buy set up on a price consolidation that hasn't stopped me out. MVK was an example of that.
We should not add to positions that are still building a base. We don't know which way price will break out of that base. I saw a guy on TCNet that built a very large position on ENCY during this basing period.
stockcharts.com[h,a]daclyiay[d20051228,20060326][pb20!f][vc60][iut]&pref=G
The position represented a larger percentage of his portfolio than his other stocks.
Here's what happened yesterday.
stockcharts.com[h,a]daclyiay[d20051228,20060327][pb20!f][vc60][iut]&pref=G
That one trade, in one day, wiped out half of his capital on the trade and he didn't say how far back it set him on his portfolio.
So, keep in mind, when adding to a position, you want to add to one that is winning and you still want to take partial profits as the position heads higher. When we learn to manage profits properly, we aren't allowing the market to take them back.
We should not add to a losing position. In almost all cases, adding to a losing position is a lack of courage on the part of the trader to admit a mistake. When one averages down, they aren't managing their position, they are managing their ego.
The key thing about position sizing is that it should be consistent so that one trade doesn't make or break your portfolio. You can have 4 winners and 1 loser and still be showing a loss because the loser was a larger position.
I buy the same dollar amount on every trade, not share amount, dollar amount. I can have 4 losers and 1 winner and still have a winning portfolio because most of my trades carry a 2 - 1 reward to risk ratio, losses are kept to a minimum and I allow my winners room to expand.
Position sizing and money management are the keys to consistently outperforming the market.
dabum |
