Many traders will practice adding to a winning position as well as subtracting from a winning position. These strategies can be very helpful to let your winners grow.
Many traders will practice adding to a winning position as well as subtracting from a winning position. These strategies can be very helpful to let your winners grow.
Many traders will practice taking away from their position once a given level is hit. For instance say you want to buy 100 shares of XYZ stock at $45. You have a target of $55, but if the stock gets to $52 you would take half of the position off.
Why would you take profits early? Basically to guarantee any profits you already have. This way even if the stock pulls back and hits your stop you would still exit the trade on a positive note even though it turned around on you at the end.
The disadvantage to doing this is you are missing out on potential profits that you might get from holding onto the entire position.
The other way you can adjust your position is by adding onto it. As a stock price increases it can be a very wise decision to add to the position every time the stock pulls back. This way you can put more and more money onto the positions that are winning at that time, at the same time keeping your stop on it or even pushing it up.
Where you get in trouble is when you decide to add to a losing position. Many new traders who try to trade the market using Mental Stops, or imaginary stops, will sometimes find themselves in a position where they are way behind in a position.
They may have bought 100 shares when the stock was at $50 and now the stock is at $30. Then they get the smart idea of buying another 100 shares at $30 to lower their breakeven point, Big Mistake. A stock may take years to decades to recover such a steep fall, if it recovers at all.
Besides you never want to hold onto a stock in a downtrend let alone add to it.
For more information about the stock market visit http://www.stocks-simplified.com
To review some stock market terminology visit http://www.stocks-simplified.com/Stock_Trading_Terminology.html
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