Building a Position | Trading Lesson
Position Management

Building a Position

Master the art of averaging up strategically to maximize profits while maintaining tight risk management and turning modest gains into significant account growth

Building a position strategically is one of the most crucial skills for traders who want to maximize profits without taking on excessive risk. This lesson covers how to average up effectively, using profits to finance additional buys, while maintaining a tight risk management framework. Mastering this approach can significantly enhance your trading edge and allow a few strong trades to make your year.

Learning Objectives

By the end of this lesson, you will be able to:

  • Understand the concept of adding to winning trades using profits
  • Learn how to raise your stop loss to reduce risk while increasing position size
  • Practice calculating cost bases for scaled-in positions
  • Recognize scenarios where this strategy works best
  • Appreciate the role of discipline and consistency in building positions effectively

The Concept of Buying in Pieces

Definition

Buying in pieces means entering a position gradually, starting with a smaller initial trade and adding size as the trade confirms its potential.

Why It Works

  • Reduces initial risk
  • Allows you to size up as the trade proves itself
  • Balances risk with reward

Key Principle

You finance your risk for additional purchases using profits from your initial position.

Practical Example: Averaging Up

Let’s break this process down step by step:

  1. Initial Buy:
    • Setup: Use an outside reversal into the 20 EMA as your initial entry
    • Stop Loss: Place your stop just below the reversal day’s low or the 20 EMA
  2. Follow Through:
    • Observation: The stock closes higher, forming a bull flag
    • Second Buy: Add to your position on the breakout of the bull flag
    • Adjust Stop: Move your stop loss to the low of the breakout day
  3. Scaling Example with Numbers:
    • Buy 10% at $36 with a $1 stop
    • Stock rises to $38, forming a bull flag
    • Add another 10% at $38.50
    • Adjust your stop loss to $37.75

Result

  • Total position: 20% of your portfolio
  • Average cost: $37.25
  • Risk: Only the profits from the initial move (5% gain)

Managing Your Add-Ons

Key Tips

  • Use Early Confirmation Patterns: Add within the first 2-3 days of the move
  • Avoid Top-Heavy Positions: Don’t over-extend your cost basis by adding late
  • Treat Each Add-On Separately: Manage initial stop loss for each tranche. Later, consolidate stops as the trade progresses

When It’s Ideal

  • During a breakout from a large base or BGU (buyable gap up)
  • After identifying a high-conviction setup with strong follow-through
  • When the stock shows a combination of technical strength (e.g., bull flag) and volume confirmation

Common Challenges and Solutions

  1. Fear of Adding Risk:
    • Solution: Raise your stop loss after each addition, ensuring overall risk remains low
  2. Managing a Losing Trade:
    • Solution: Cut your losses if the stock breaks below your adjusted stop loss
  3. Dealing with Inconsistent Results:
    • Solution: Understand that most of your gains will come from a few trades. Focus on consistency, not perfection

Reflection

How would you modify your trading strategy to incorporate the concept of buying in pieces?

Conclusion

Adding to winning trades while managing risk is a powerful method for achieving outsized returns with minimal downside. By averaging up thoughtfully and leveraging follow-through moments, you can transform modest gains into significant account growth.

Successful trading doesn’t rely on perfection but on a disciplined approach that balances risk with opportunity. Incorporating this method can turn a handful of great trades into the foundation of your trading success.

Action Items

  1. Apply the Strategy: Find a stock exhibiting a high-probability setup. Enter with an initial position and simulate additional buys
  2. Backtest the Approach: Use historical charts to identify opportunities where this strategy would have worked. Analyze outcomes
  3. Risk Tracking: Record your risk adjustments as you add to positions in a trading journal. Reflect on how this approach affects your results