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How to play the game

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Adding Too Many Positions

Are You Adding Too Many Positions?

Let me start by saying… I get it… there are many ways to skin a cat, and there’s many ways to profit in the Markets, but the 1 problem that tends to stare many of you in the face, is the problem of adding too many stocks and too many positions

Hopefully in the next 2 minutes, I can give you a little food for thought and give you a decent little strategy to contemplate moving forward.

To give a little context, over the last 2 years, I’ve had hundreds of conversations with disillusioned Traders across the world, and I see the same recurring issues time and time again, and the 1 problem that keeps cropping up, is the problem of adding too many positions at once, or to offer another (albeit slightly different issue) - over committing on 1 individual sector.

Lets take the example of a thoroughly lovely chap from Canada whom I’ve spoken to a couple of times now in the last 12 months…. Retail Trader… Trading with a lot of capital….stressful career as a Doctor… young family, and had 65 Open Positions when we last spoke 3/4 months ago, 50 of them Tech based…. it’s probably staring everyone in the face, but does anyone see a number of issues here?

A highly intelligent individual (certainly academically more accomplished than I)… yet the Financial Markets appear to have a highly intelligent man acting in an irrational manner, and although I won’t comment on the potential reasons for this, it’s worth noting, although 65 Positions is obviously extreme, I have at least 1 conversation a week with individuals that have the same problem (albeit on a smaller scale).

If you want to add 65 Positions and expect to obtain success in the Markets, it might be prudent to start preparing yourself mentally for the inevitable inconsistency, because if you have a lifestyle that doesn’t fit around your Trading style - it’s unlikely you’ll have the tools to make it work - at some point it just becomes unmanageable.

So how many positions are too many and when should I look to add more in?

Let’s think about this logically, and let me add the caveat that I am NOT talking about Investing… I’m looking at this from a purely logical / rules based Trading style built upon solid judgement.

So let’s say you’re out the market, and the market starts to look appealing to you, and you decide you want to buy in to 10 positions… would it not make sense to choose only a couple of stocks and buy into 2 positions and wait until those positions move into good profit before adding positions 3 and 4? 5 and 6? etc etc

The advantage of doing this?

You’re giving yourself a solid head start, because lets say you jump into 10 positions and the market immediately reverses against you… that’s 10 positions that are going to give you some severe mental hurdles to overcome, and it’s 10 positions where you may have to accept a loss (which is horrible - it usually means a heap of capital lost).

I don’t like stress in my life, and I don’t like stress in my trading.

If you take the approach of methodically scaling into the market, experience tells me it’s easier and safer, and if you get it right, you’ll be adding in new positions with profit already accumulated, so IF the market does reverse on you, at least you have the profit “insurance” in place and you can possibly get out a declining market with no losses (and hopefully a bit of profit).

You can scale into 10+ positions and accumulate massive profits in a Trending Market - but inevitably, when the market switches and it’s no longer trending (lets say it’s moving sideways), some of you may wish to only scale into 4-5 positions… it’s always about your own risk tolerance and you’re trading style.

The Market is currently playing a bit of sideways action at the moment, if you’re unsure how to approach it, or if you’re struggling with results, feel free to click the link below and tell us what you struggle with - we’ll try to help.

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Sam McCallumComment