I often want to go into a trade but I find my entry level isn’t perfect. It might have already bounced off the lows a bit and isn’t as low as I’d ideally get in, or it might have not yet hit my precise support level but already seems keen to move off without quite making the “perfect” technical formation.
In these situations I use a technique known as position building.
Opening
Example - I think the FTSE Rolling Daily is going to rise from 4200 and I want to trade £2/point on it. It’s trading 4222/23 having already bounced off the lows of 4200. I missed for whatever reason, the opportunity to buy £2/pt down at the lows but still want to enter the trade, so I buy £1/point at the 4223 level and prepare to position build.
Position Building at a Cheaper Price
I’m in the trade with half my stake so if it continues to go up without returning to the 4200 lows, I’ve managed to get in without exposing myself to an extra 22/23 points of risk. I’m also in the advantageous position whereby a return to the 4200 lows will not heavily threaten my P+L (because I’m only in for half my usual stake) and I can buy another £1/point, build my position, at the cheaper price (e.g. 4201) ready for when my anticipated move occurs
Why?
This additional £1/point lowers my aggregate trade entry price from my original 4223 entry and means that I can now break even at a lower level, 4212. Anything above 4212 is now profit at a rate of £2/point.
Note that anything below 4212 is a loss at a rate of £2/point, but because I would have ideally been trading that stake anyway, I’m comfortable with that.
Position building at a higher price
Let’s imagine now that after buying the first £1/point @ 4223, the FTSE continued to go up instead of dropping to 4200. To get back to my preferred £2/point exposure I buy another £1/point to build my position at a higher level, maybe 10 or 20 points higher than my entry point. (e.g. 4243)
How?
The exact level isn’t so important but I like to build my position once I’m confident that a return to my original entry price of 4223 is unlikely. This is usually when the upward momentum has become evident and I’m in the middle of the rally I anticipated from the start.
Points to Remember
Position building increases overall exposure, but this is what we’re looking to achieve.
When building at higher prices the break-even price for the trade rises to become the average of the entry prices. (e.g. 4233 from the example above)
Wait until the momentum really is with the move, reducing the chance of the market returning to your higher break-even point.
Until next week, happy trading
Andrew Hutchings - Account Manager - Tradefair Spreads
The above comments do not constitute investment advice and neither Tradefair Spreads nor Clean Financial accept any responsibility for any use that may be made of them.
Risk Warning:
Spread bets carry a high level of risk so you should only speculate with money you can afford to lose. You can lose more than your initial deposit and stake. Before you open an account, please ensure that spread betting matches your investment objectives, familiarise yourself with the risks involved and if necessary seek independent advice.
Article provided / approved by Tradefair Spreads which is a trading name of London Capital Group Ltd which is authorised and regulated by the Financial Services Authority (FSA), FSA Register number 182110.
Tradefair® is part of the Betfair Group.
'Trading and Position Building' edited by DB, updated 06-Jul-09
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