In our forum I ran across the question “when people say they are “building a position.. what exactly do they mean.” There were some great answers following this which spawned the question “would you ever add to a position that is allready positive” I thought both of these questions were great questions to ask so I felt compeled to provide some input on the blog as well as in the forum.
Before I post my explanation I want to encourage you to visit this thread and read over the comments from those that are getting involved in the community as they all have given excellent feedback about what building a position is. Additionally I would like to thank them for there contributions as that is the kind of involvment we need to create a place where everyone can learn from one another. I will not touch to much on what it means to build a position as there are great explanation of what that means in the blog however I do want to talk about adding to a position that is allready in profit.
There are times that you might want to add to a position that is allready in profits. Managing risk and leverage is something that you should always keep a close focus on. As an example lets assume that I am expecting a 4oo pip move over the next few days to a specific target.
Traditionally I would enter with around 1:1 leverage above the level the I suspected to be the bottom and then if it went against me I would add to my position as the market fell to my expected bottom. Once the market makes it to that level I would typically be at around 5:1 leverage and then hold for my target. The reason for starting early is so that I wont miss the move to my target if it happens to take off before going down to my expected bottom.
Now lets assume for a second that the market begins to move towards my target without making a dip down. I still would like to be in the move with around 5:1 leverage. So after the market makes a move up if I believe that it has the momentum to continue I will let the market establish a new swing low after the surge up and then add when it comes back to support. This new support would be above my initial entry therefore I would be adding to a positive position.
A lot of people consider adding to a losing position to be a bad habit and I would agree when it is not planned for however if you understand leverage and have a good grasp on how the market flows than it is a great way to make consistent profits without spending hours in front of the computer sweating it out. Just be aware that when it goes against you its just part of the way the market moves.
You cant expect to enter and be in instant profits every time ( unless you are news trading ) Just kidding of course. There is always risk. At any rate I hope that gives you a better understanding of building a position. The idea is to have a target size for your position and to build up to that position in a strategic manner. If you go all in right away it is very difficult to manage your way out of the trade if it does go bad.
If you leverage your self properly you can just about make a positive trade out of anything. I mean net profits of course. Meaning that you may have 5 lots in a certain currency at different places and when you close them all out 1 or 2 may show a loss but when averaged out they show a net gain. Hope that helps.
Additionally I discuss what leverage is and how to figure out how much leverage you are using in this same thread so I want to encourage you to read through this thread and discuss any pointers you may have on this topic. My comments on leverage are on paege 2 of this thread.
