Establishing Partial Positions
- Posted by Leigh Drogen
- on September 27th, 2010
I have a list of posts that I would like to write focusing purely on how I operate in the market. Everyone takes a different approach, but many have asked me to share on this blog my strategies and what works for me as a momentum/trend trader.
Let’s talk about establishing partial positions and why that is so important to the psychology of momentum trading.
When I identify a stock on my watchlist that is showing a good risk/reward entry to the trend, I don’t normally take a full or oversized position all at once. I like to layer into the trade. There is no one right way to do this, sometimes I buy 1/4 positions before the breakout, sometimes I buy 1/2 positions as the stock is breaking out, and sometimes I buy 3/4 of a position after the breakout. Those by the way are just possible examples, there are a million other combinations. This is not an exact science. What I want to stress is this, establishing a partial position either before or after the breakout is important.
I like to establish 3-4% portfolio positions as a stock sets up, and if all goes well, add to that position after the confirmed breakout. Total portfolio positions usually land between 6-7%.
Now the reason that I establish this half position is to test the waters of the stock. I can’t watch 200 stocks all day for breakout entries, and I think even if I could it would be detrimental to my trading. Pattern recognition is as much an art as a science, and trusting your intuition is an important part of this game. Over the course of time you will learn to trust your feel for a specific stock, the market as a whole, or a specific pattern that has worked for you many times in the past, as well as those which don’t. Establishing a test position is important because it gives you confidence when it moves in the right direction, and doesn’t cost you as dearly when the market moves against you.
The other reason establishing partial positions is important, is because a stock can run away from us before we are able to take our initial position. Breakouts in good stocks happen fast and as I said, you can’t have your eyes on every stock in your watchlist. By establishing a partial position you will have your foot in the door before the breakout and emotionally you won’t feel like you are chasing the stock when you add to your position as it is up 5% on the day and breaking out. This psychological aspect is extremely important because it can bend your judgement of the setup and the trend in bad ways. Maybe the stock doesn’t look as good to you now that it’s past it’s primary entry point, but if you’d have taken a small position and seen a little green in the P&L column, the secondary entry might not look as bad.
Once you have your partial position, you’re looking for confirmation of the breakout to add. I like to add the full position during the day that the stock breaks out, again, in 1/4 position size increments.
We will talk about trading around your core 5-7% position in another post.
Full Disclosure: Nothing on this site should ever be considered to be advice, research or an invitation to buy or sell any securities, please see the Disclaimer page for a full disclaimer.
blog comments powered by Disqus
Leigh Drogen is the founder and chief investment officer of Surfview Capital, LLC, a New York based investment management firm employing an intermediate term long/short momentum strategy. More »
- The Panic Is Relatively Confined
- School For Bums
- Estimize Raises Series B Led By WorldQuant Ventures
- Will Automation Make Africa The Lost Continent
- My 2015 Stock Picks and Big Trends
- Is Israel In Danger of Being Destroyed?
- Review Of My 2014 Picks and Trends
- The Most Powerful 27 Year Old In Finance?
- You Won’t Believe What This Asshole Said About Yo
- Deltix Publishes Quant Strategy Using Estimize Data Producing 28.5% Cumulative Market Neutral Returns
- August 2015
- April 2015
- January 2015
- December 2014
- July 2014
- June 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
- May 2013
- April 2013
- March 2013
- February 2013
- January 2013
- December 2012
- November 2012
- October 2012
- September 2012
- August 2012
- July 2012
- June 2012
- May 2012
- April 2012
- March 2012
- February 2012
- January 2012
- December 2011
- November 2011
- October 2011
- September 2011
- August 2011
- July 2011