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The Prudent Position Trader

If you are a position trader, try not to be in such a rush; especially in uncertain markets. A hasty click of the mouse can be a costly mistake.

Let us be frank for a moment, we all try to catch the falling dagger. When we manage to pick the bottom and turn a nice trade, we applaud our patience and picking ability. When we get nothing but blade, we vow never to attempt bottom fishing again. Let me suggest a strategy which is extremely common, but all too often forgotten when our favorite issue sells off: averaging.

Dollar cost averaging is a very popular tactic for long term investors that have favorite issues. Basically stated, averaging is the tactic of purchasing, usually, set amounts of a particular issue at regular time intervals, be it every month, quarter, or a year or more. This strategy allows the long term investor to take advantage of break-outs, and declines, by buying regardless of the current price, thus averaging the cost of their position. But this strategy can also be very effective for short term position trading, or even day trading.

Depending on the market sentiment at the time, combined with the volatility of the issue that I am following, I will break up my position into two to four separate buys..

Stock XYZ comes screaming down out of the 70s and you are "sure" it is a screaming buy at 60. First, you must consider the volatility and relative valuation of the issue. With XYZ, it is extremely volatile, and the relative valuation is extremely high. It is impossible to foretell a bottom on a stock such as this. To take a 100% position, expecting 60 to be the bottom, is a pure gamble, lose or win. With a 100% position, should the sell off continue to 55, you have no capital left to reduce your cost. If the issue is extremely volatile, split your buys into four separate 25% positions. When XYZ hits 60, watch and wait, pick your entry based on a recovery past a certain point, and place your first buy. After taking your first 25% position, I do not recommend taking an additional position the same day, you must be patient. As an alternative, should the market rally into the close, I will sometimes pick up another 25% in order to take advantage of the rally. To add the remaining positions, I watch and wait over the next few days seeking to capitalize on further weakness, or significant recovery, until I have my 100%position.

I also use this same tactic with slower movers as well. If the issue is not volatile, I will split my trades in two or three separate buys, and use the same tactic.

Don’t think that this average strategy can’t be performed over a week or more. Like I said earlier, averaging is an effective strategy for all time frame trading, it just takes patience. Try to remove the element of gambling from your trading habits. There is no way to remove the risk from trading, but there are strategies and disciplines available to you to make your trading experience much more enjoyable and profitable.