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Adding to Positions

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I have seen a few posts in the community about adding to a position and would appreciate a little more insight if possible. Is it right that the initial deal is a tentative toe in the water and then when all indicators are in harmony a further position is taken? Or is it that a when the indicators match on your trading plan, the initial deal is set. Then on a wave two dip or rally, a further position is taken. Or is it another possiblle scenario. I understand the benefits of adding to a position but wonder about stop levels and the confidence of adding to a trending situation that is further ahead in time and price and therefore possibly less likely to continue far enough to warrant the risk. All comments much appreciated.

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@Nelsy-Boy,

This question comes down to your 'Trading Philosophy'. What is yours? That will help to answer the question. I personally follow the 'Trend Following' philosophy so I add positions as the trend moves in my favour.

My initial trade certainly is not a tentative toe in the water as I am only going to enter the trade once certain signals are met and indicators support this. Adding positions is included in my 'Trading Strategy'. I want to try and maximise any profits on a strong trending trade so I 'Pyramid' by adding positions as the price moves. 

Of course if you are an 'Elliot Wave' Trader then your strategy may include 'Waves' in any scenario when you add to your position. It may be at A, B or C or at certain Fibonacci points. 

On your last point when I enter a trend I have no idea how long it is going to last or which point I am in that trend. Your initial entry may be near the first 10% of the trend and your additional position may only be 20% into the trend. There may still be 80% left of the trend. Trend followers will want to see new higher highs being formed and new higher lows being formed on upwards trends and vice versa for downward trends. If you think there may only be 10%-20% left in the trend because it has mainly played out then I would be inclined not to enter. So for example, I thought I called the direction of the trend right on Oil. I did not trade it as by the time I seriously considered it the move was so quick that I felt I had missed the majority of the trend and following the trend but not be worth the risk/reward. So I can see where you are coming from on this point. 

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I agree with the Trend follower post

I think to me it means trying to be right when is saying otherwise.

I would wait until price reaches my risk to favorable reward level.

In trading I believe the amount of risk is only sure thing.hence I would always wait until odds are in my favor,it is tempting to enter early due to herd state.

 

 

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@Tradingview,

Yes quite right. My trading style is all about trying to increase the odds in my favour and enhance the probability of a profitable trade. No guarantees of course.

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@Nelsy-Boy, @Tradingview & @TrendFollower'

There are no hard and fast rules (like everything else in trading) but from my own perspective there are times when an initial position is taken with a view to add if the trade takes off. Any addition should be done with the same conditions as per your trading plan so if you buy dips and breakouts you will be waiting for those setups to present themselves for a second entry.

A common theme is to buy the dip then add on a breakout past the First Trouble Area (the prior higher high preceding the dip). This gives the opportunity to move the first trade stop loss up to join the second trade stop loss just behind the breakout level locking in profit on the first trade and so negating any loss on the second if price reverses thereafter. If as hoped price continues higher then you can simply trail both stops in unison behind the subsequent higher lows.

 

 

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like this thread and agree with a lot that has been said. I'm a big advocate for trading into and out of a position in a step fashion. Especially for take profits and stop levels.

For example (very very roughly), if the market is 100 and I buy, i'd have stops at 93 , 92, 90 and 85 for example, and take profits at 110, 115, 125

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Good questions @Nelsy-Boy, the answers are both simple and complex, as with all things in trading (and life really) nothing is as simple as we would like it to be.  It is simple in concept in that adding to positions in a trend is what all successful traders do and at the superficial level the concepts are straight forward: "buy the dips"; "sell the rallies"; "buy low, sell high"; "buy weakness, sell strength" etc. It is complex in that there are many ways to execute and each time you take an add-on it is a new trade that must stand on its own merits.  In some ways it can be harder to add positions than take that first one, for many of the reasons you have noted.  Also there are psychological factors with adding and getting it wrong that may drive you to cash your initial position too early to cover losses (a critical error perhaps only eclipsed by not taking profits that then turn into losses!).  It is also harder to buy or sell the further the market moves from the original turning point, for obvious reasons, chiefly getting caught in a trend change.  Therefore it is a legitimate strategy NOT to take add-ons, especially early in your trading career, until you have a good feel for the market in questions and trust in your methodology.  You need to be clear on whether you are in a long term trend or a counter trend move or a period of consolidation (I assume the same is true for day traders within the day or few days time period but I am talking from a long term perspective only).  If you try to take add-on in the consolidation phase you will most likely get killed and markets spend more time in consolidation than in trends on balance.  So it vital to know what kind of move you are in and where in that move you are.

Once you know where in the move you are it is just trading really.  The concept of adding positions must be an integral part of your trading methodology and strategy for a specific market move (i.e. with the trend or counter trend or range trading).  In terms of methodology, in my case, the criteria are the same as for the initial trade with one exception.  Due to the nature of the way I trade the first trade is on the trend change so I have a number of indicators and criteria specific to identifying that change.  These will not be present in subsequent add-ons but many of the criteria I use will be present in both (indeed must be).  The add-on trade must make sense in the context of the overall move.  For this I use channels, and other charting techniques, and Elliot Waves to help figure out where in the trend we may be, although it is not always easy to pin point a wave 1 turn for example, as you can see from my FX and Brent Oil posts over the past few months, also to a lesser extent Gold/Silver (watch these markets closely over the coming month and you may get a live example of what we are talking about in terms of counter trend moves).

If you like to swing trade then the approach is a bit different.  You need a mechanism to tell you when the waves of a move will switch direction from motive (with the trend) to counter trend and back again.  Again EWT is crucial to me for this but to execute a trade (whether closing a previous swing or opening a reversal) the price action must confirm what my methodology is telling me.

So let's take a recent example to make this real, the Dow since October highs (see daily chart below).  I wont reprise my assessment of why I believe October was the end of the Bull, see other posts, but the salient point is that I switched my bias back to Bearish and was actively searching for Shorts from early Nov.  My first opportunity came at Pink 2 with a turn at the Fib 76%, very similar to the 2007 Credit crunch set up, which I was using as a path finder.  I added at the halfway Pennant and closed when it hit the strong support area (wave 1 blue) on strong Pos Mom Div and a clear EWT 1-5 wave form (ripe for a reversal).  At this point I took a Long but did not add because my bias was Bearish and I felt this was a counter trend rally (I don't do much pyramiding on counter trend moves as I switch from a trend following to swing trading strategy).  I exited the Long at the FIb 62% but the rally went on and gapped up to the Fib 88% (Blue 2).  At this point a took a low exposure Short (stops just above the pink 2 turn) and the market dropped (Nice!).  Now I was into some serious pyramiding (note this doesn't just mean add-ons but leveraging the profitable trades for margin so care is needed to manage margin carefully as the move proceeds (I will look at this move more closely later on the 4 hour chart).  At the end of the move (Christmas), while resisting the psychology of the "Santa Claus Rally", I exited all my Shorts below the Fib 62% once I realised the wave 1 was likely to have completed.  Alas, owing to the Christmas break, and not expecting a Boxing day rally, I did not do this nearly as well as I would have liked but C'est la Guerre...  I have now switched to a temporary Bullish bias but only insofar as I believe this to be a counter trend wave 2 to set up the Really Big Short!  I am in swing trade mode but with extreme caution and retain long term Short around the Blue 2 area.

Ok so lets look at that wave 2 blue move on the 4 hourly chart then:

  • Actually first the Pink 2: I had a turn with a small pin bar at the Fib 76% off the all time high and Neg Mom Div on the hourly chart.  I waited for a small 1-2 reversal and went Short with stops just above the Pink 2 top (very low exposure).  There was a fairly fast drop after that and not yet being fully confident of the Bearish set up I did not add at this point.
  • The next opportunity came with a small pennant consolidation (usually roughly at half way in a move) and I went short on the breakout of the lower line of this Triangle with stops above the highest point of the consolidation (again very low exposure).  Again we got a fast drop (this is the great thing about Short trading, when it works it works fast) and I did not add on the EWT 3-4 retrace as I felt it was too close to the strong support and potential neckline just below.
  • Sure enough that support zone ended the wave at Blue 1 on strong Pos Mom Div and a clear 1-5 (motive - the next move would be counter trend).  I exited all shorts as I was not yet sure of the Bear and preferred to bank and leverage fresh Shorts higher up.  I entered a cheeky Long but only 1 and exited at the Fib 62% to prepare for the next Short (psychologically).
  • With profits in the bank to leverage I waited for price action to give me a signal.  I got this with the large gap to the Fib 88%.  On the basis that gaps are usually filled quickly and the the Fib 88% was the last turning point I went Short with stops just above the Pink 2 high (again very low exposure).  The market dropped fast again (bearish encouragement) and I had a nice channel on the blue 1-2 move so when I saw a small break and retest of that lower channel line I went Short on the failed retest with stops just above the Blue 2.
  • Very strong drop the day I took my first add-on (which is really great encouragement) so now I could move my stops to break even on all Shorts (note I was trading the Nasdaq in parallel).  Baring a crazy flash spike I was net no loss risk at this point.  There was a small period of consolidation followed by another fast drop.  I didn't trade this, I remember kicking myself at the time but the market then offered another opportunity with a retest in A-B-C form so I went Short on the one hour reversal pin bar.  The market then put in another retrace with Pos Mm Div at Green 1.  This, together with my EWT labeling suggested a 1-2 so I cashed that last Short and waited.  Note I was fully Bearish on this move so not swing trading.  Sure enough the retrace was in a pennant form and when this was broken to the downside I went short again, leveraging my no loss trades from higher up.  I let this move run through the next support line, coincident with wave 1 Pink and did not add further until I saw a retest of that support (now resistance) and went Short again on the failure of this retest, with stops above the previous high on 17 Dec (again very low exposure).
  • After that it was just daily sell the rallies until the overall move completed.  As I noted earlier I was not alive to the reversal over Christmas, unusual to get so much action during the Christmas break but then this is not a usual market.  I took a small Long on the first major retrace as the Fib 50% was breached and then price returned above it, stops below the spike.  I exited when I saw the rally breakdown into consolidation at over head resistance and reversed into another Short on Wednesday of this week with stops just above the Top of the recent rally.  I exited these Shorts last night on a reversal in the Nikkei with a bounce off its long term supporting Trend line and with US NFP today I prefer to wait and see but if the market follows my previously posted road map, which it is so far, then we will see a rally to the Fib 50% off the all time high, which I believe will be a wave A or a counter trend retrace.

Note that such a wave 1 is actually quite hard to pyramid as there is still a lot of Bull/Bear tension around.  If the current move is a counter trend move I think it could reach the Fib 62% but it is likely to contain a lot of whipsaw action so pyramiding is off the table, this is swing trading territory but highly dangerous.  I may very well ease off stocks and wait for a while, conserve my account to support the next Bear move.  The Wave 3 to come (I believe) will be much more Bearish so it is likely to be pure sell the rallies once it gets going.  Not for the fainthearted...

DJI-Daily_040119PYMD.thumb.png.c911fcfab9524b4532c05298ab9c2288.pngDJI-4-hours_040119PYMD.thumb.png.f760d2b260fde55f58b7e2e5735a1a16.png

 

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Thanks to all for the fantastic answers. Looks like I've got plenty of homework to do. Much appreciated.

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