Establishing Partial Positions

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.

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