Adjusting a stock position

Many traders will practice adjusting a stock position, either by adding to a position or by subtracting from a position. These strategies can be very helpful but must be planed before you enter a trade.

Many traders will practice taking away from their position once a target level is reached. For instance say you want to buy 100 shares of XYZ stock at $35. You believe the stock will reach your a target of $50, but if the stock gets to $45 you would take half of the position off and keep those profits.

Why would you some take profits early? Basically it is to guarantee any profits you already have. This way even if the stock pulls back and hits your stop you would still exit the trade in positive territory even, though it turned around on you at the end.

The disadvantage of doing this is you are missing out on the potential profits that you might get from holding onto the entire position. If you take half off and your stock shoots up to $57 then you have lost potential profits.

The other way you can adjust your position is by adding to it. As a stock price goes in your favor it can be a very wise decision to add to the position every time the stock has a pull back. This way you can put more and more money onto the positions that are winning at that time, at the same time keeping your stop on it or even pushing it up.

Jessie Livermore was noted for doing this. If he was not sure if the markets where trending he would buy a few positions to test the waters. If they went in his favor he would buy more.

While adding to a winning position can be helpful, you get in trouble is when you decide to add to a losing position. Many new traders who try to trade the market using Mental Stops, or imaginary stops, will sometimes find themselves in a position where they are way behind in a position.

They may have bought 100 shares when the stock was at $50 planning to exit it if the stock falls to $45. Now the stock is at $30 and they didn’t exit it because they thought it would come back. Then they get the smart idea of buying another 100 shares at $30 so they can lower their breakeven point, Big

Mistake. A stock may take years to decades to recover such a steep fall, if it recovers at all. Besides you never want to hold onto a stock in a downtrend let alone add to it.

If you do decide adjusting your position sounds like a good idea make sure that you do have a plan for when to adjust. The best time to plan your trade is before you took the trade.