Often, investors are faced with the decision of whether or not they should add to their current positions. This usually happens when you buy into a position, lose 5 or 10% and look to lower overall costs by buying more shares at a lower price. This is called “pyramiding or averaging down” and is an awful strategy unless you have inside information.

Current Market Conditions

Today, investors have become accustomed to the constant whipsaw effects of the market. It is a common thing to be up 20% in a stock one week only to find yourself down 20% the next. The market is becoming numb to bad news and jumps at the sight of a possible sign of recovery.

To manage a portfolio in these conditions requires mental stamina, clear-headed analysis, and an objective hand to carry out orders.

The Strategy

After thinking about how to make my trading more objective and successful I have come up with the way to manage your positions. The strategy is very simple but requires a good bit of self-discipline.

Whenever you open a position, you cannot add to it.

I’ve read a lot about cutting your losers and adding that capital to your winners, but that strategy is not applicable to this market setting. The hardest thing to do is to have a position that is up 10% and not add to it.

The most common outcome of adding to a position after holding it for several weeks is that the security will reverse direction and you will lose more than you were up. Most of all, adding to a position as an amateur only signifies greed and emotion. Keep both of these out of your trading and watch your profits grow.