How do you work your way into a major trading position? Do you take a position all at once, or do you increase your exposure over time? Do you trade a single stock or ETF, or do you spread your capital among a few different securities?
There isn't a "right or wrong" answer to these questions, although as a trader you should have a process for how you enter trading positions.
Much depends on the market environment, your trading capital, your risk tolerance, and the liquidity of the securities that you are trading.
One of the biggest advantages of being a small investor (compared to the institutional desks managing hundreds of millions) is you can get in and out of trades without worrying about whether the market can handle your order.
Larger traders often have to build (and liquidate) positions over several days or even weeks. Imagine being stuck in a losing position and knowing you can't sell all of your shares for weeks at a time.
So being able to enter and exit a position quickly is a huge advantage to the individual investor, but there are still times when I like to build my positions slowly in order to keep my risk in check and capture large profits with a relatively small amount of capital.
Let's take my current positioning on natural gas, for instance. On Wednesday of last week, I recommended subscribers to my Velocity Trader service take a bullish position on natural gas.
While we've been avoiding this market for quite some time now, the clean burning fuel is now showing clear signs of a bottom, and we took an aggressive trade expecting the rebound to continue.
Sure enough, this week we booked 45% profits on half our position even as the broad stock market opened sharply lower. Natural gas is following through on its bullish pattern and sentiment levels are in the early stages of a major shift.
What you may not realize is this option play on the United States Natural Gas Fund (UNG:NYSE) is just the beginning. This is my first step in building a larger position in a number of securities that will benefit as natural gas prices stabilize.
Next up will be positions in natural gas producers, possibly pipelines, and liquid natural gas technologies. You see, I can use the profit I've accumulated with this first trade to build into new opportunities. The key is to build new positions without adding risk to your initial capital.
Over the next few months, I expect to become increasingly active in the natural gas area. That of course is assuming prices follow through and our trades continue to work as planned. The beauty here is that by the end of the summer we may very well have a huge basket of profitable trades relating to the natural gas market.
But because we are building our way into these trades using accumulated profits, the risk to our initial capital will be miniscule... Just another way professional traders structure their exposure to maximize returns while being very picky about how much risk they are willing to take on.
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