Dipping Your Toe in When Trading
Posted on July 10, 2009 - Filed Under Investing | Leave a Comment
Sometimes I'll come across very strong stocks that you want to get into. The only problem is while they are fundamentally strong they might have no trend.
So what can you do? I like the idea of dipping my toe into a position if I'm unsure. Say you find a stock trading at $30. The stock has been pretty flat, but you think it might start to trend higher. You have $5,000 that you want to put into it, but are a little scared because the technicals are not that strong.
Instead of investing the full $5,000 it can be a good idea to just put say, $1,000 into the trade at first. If the stock starts to go up and form an uptrend then you can buy more shares and average up until you have put your full investment into the position.
Once I am in an up trending stock I can just follow it up using a trailing stop to get me out of it quickly when the trend does eventually end.
If you get in the stock and it doesn't start to trend up other hand you can always get out and cut your losses short. But the good thing about dipping your toes in is that your losses are not as high as they would have been had you put your full investment in the stock.
Testing the waters can be a great way to minimize risk, while at the same time it allows you to get into a position before it starts to take off.
For more on averaging up visit http://www.stocks-simplified.com/Average_Up.html. For more on trend trading visit http://www.stocks-simplified.com/Momentum_Investing.html
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