How To Buy Stocks: Trading Around A Core Position | Investor's Corner | IBD

TL;DR

Learn how to appropriately size your stock positions and manage them over time to maximize investment gains.

Transcript

when we talk about how to buy stocks knowing how to appropriately size your position is a key component of portfolio management and even more importantly knowing how to handle that position over long periods of time is an invaluable investment skill you may hold a given stock over a period of weeks months or years and the size of that position in y... Read More

Key Insights

• 🧑‍🏭 Position sizing depends on factors like risk tolerance, portfolio size, and performance.
• 💦 Flexibility in starting a smaller position to test the waters or scaling up on subsequent bases and breakouts is important.
• 💯 Adding to a core position during a stock's rally can help amplify gains, but follow-on buys should be smaller than the initial purchase.
• 🥡 Selling into strength or taking partial profits can protect against potential pullbacks.
• 🤩 Incremental scaling and flexibility are key in portfolio management to build profits over time.
• 💪 Industry group rotations can be capitalized on by starting positions in multiple strong stocks and shifting capital to the one that outperforms.
• 👻 All or nothing decisions should be avoided unless a stock is performing poorly, as scaling in and out incrementally allows for profit building in a core position.

Questions & Answers

Q: How do you determine the initial position size in a stock?

The initial position size can be determined by risking a certain percentage of your portfolio per trade or by limiting a position to a specific percentage of your overall portfolio.

Q: What is the 8% loss rule and how does it help with position sizing?

The 8% loss rule suggests cutting losses when a position loses 8%. By calculating the dollar size of a position where an 8% loss equates to your desired risk per trade, you can determine the total amount invested in a stock.

Q: How can you add to a core position during a stock's rally?

Adding to a core position can be done when a stock bounces off its 10-day exponential moving average (10EMA) or shows institutional support. These add-on entries should be smaller than the initial purchase to avoid driving up the average cost too much.

Q: Is it better to sell a stock entirely or take partial profits?

Selling a stock entirely should be reserved for when it shows definite signs of trouble. It is usually more effective to take partial profits as the stock hits sell points like the 20% profit zone or becomes extended from its 10-day or 21-day EMA.

Summary & Key Takeaways

• Position size in a portfolio depends on factors like risk tolerance, portfolio size, and overall performance.

• Initial position size can be determined by risking a percentage of the portfolio or limiting a position to a certain percentage of the portfolio.

• Adding to a core position during a stock's rally can help amplify gains, while selling into strength or taking partial profits can protect against potential pullbacks.

• Flexibility and incremental scaling are key in portfolio management to build profits over time.