Averaging Up on Wining Positions

Averaging Up on Wining Positions

Postby LenaHuat » Mon Sep 08, 2008 10:19 pm

Has any investment guru (Livermore, Templeton, Loebb, Buffett) written on the above?

If any1 forumer can recall a writing, please post it here. I'm trying to re-check my thoughts on this. Sorry, sound so kancheong but me, am an optimist abt equities. :lol:

I've tried searching through the "Investment Gurus" sub-category but it's tough to sieve this from there.
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Re: How to Average UP on wining positions?

Postby millionairemind » Mon Sep 08, 2008 10:36 pm

Lena, here is something I just digged out from Ask O'Neil - Q&A. Hope that it is useful to you.

Sunday, June 24, 2001

"Would you please explain the concept of pyramiding?"
- Submitted from Deep Park, Texas

Pyramiding refers to a strategy in which you make an initial investment in a stock and accumulate more shares as it proves to be successful. It is a way of getting into a stock in pieces, rather than risking everything you want to invest at once. For example, let's say you plan to invest $5,000 in a stock. You start by buying half that amount up front, or $2,500. Then watch what happens. If it the stock down 8% or more, sell it all. But if it goes up 2% or 3% and still looks healthy, consider buying another $1,500. If the stock goes up again, to where it's advanced 5% above your purchase price, then buy another $1,000, completing your investment. Pyramiding, however, must be done with proper interpretation of stock charts. It works when you've initially bought a stock exactly at its pivot point and the market is in a confirmed uptrend. Another form of pyramiding when you buy a stock as it breaks out from a proper base, and it advances until it forms another base. You would buy more shares when it breaks out of that second base.
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
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Re: How to Average UP on wining positions?

Postby LenaHuat » Mon Sep 08, 2008 10:49 pm

Hi MM
A BIG Thank Q... :D :) :D :) ..this post goes into my permanent file. I'll ponder over this post and issue and update my findings or thoughts here as soon as I get them out of my head. :lol:
2morrow, will google more.
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Re: How to Average UP on wining positions?

Postby helios » Mon Sep 08, 2008 11:30 pm

dear Lena,

fundamentally, i was thinking why you want to average UP?

so, you must have re-checked the growth story & discovered your Stock XYZ had indeed improved, earnings on upswings, etc (as you said, Winning positions, not just on the Price/Volume movements).

henceforth, when we'd looked far enough, why not stratified the one you have owned?

Peter Lynch's Principle #11
The best stock to buy may be the one you already own.
Many stocks which later became major holdings started out as minor purchases by Magellan. Often it is unnecessary to run around looking for the perfect stock, you may already have it in your portfolio, so buy more! It goes back to principle number 9, the number of really brilliant companies is finite, so when you do have one it might be better to buy more than to go out to find something else.

Source: viewtopic.php?f=42&t=1230&p=23954#p23954
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Re: How to Average UP on wining positions?

Postby blid2def » Mon Sep 08, 2008 11:44 pm

I still like 802's method better (I think it was 802 who shared this in WS or here last time)...

First put in 50%.
Then if good...

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Re: How to Average UP on wining positions?

Postby millionairemind » Tue Sep 09, 2008 3:13 pm

Lena,

I managed to dig this up from the book Trade like JL by Richard Smitten. He probably did more research on JL than anybody else alive.

Hope this helps.

mm

Livermore felt that it is wrong and dangerous to establish your full stock position at only one price. Rather, you must first decide how many shares you want to trade. For example, if you want to purchase 1000 shares as the full final position do it this way:
Start with a 200-share purchase on the Pivotal Point—if the price goes up, buy an additional 200 shares, still within the Pivotal Point range. If it keeps rising, buy another 200 shares. Then see how it reacts—if it keeps on rising or corrects and then rises, you can go ahead and purchase the final 400 shares.

It is very important to note that each additional purchase must be made at a higher price. The same rules, of course, would apply to selling short, only each short sale would be at a lower price than the preceding one.

The basic logic is simple and concise: Each trade, as it is established toward the total 1000-share position, must always show the speculator a profit on his prior trades. The fact that each trade showed a profit is living proof, hard evidence, that your basic judgement is correct in the trade. The stock is going in the right direction—and that is all the proof you need. Conversely, if you lose money, then you know immediately that your judgment was wrong.

The tough psychological part for the inexperienced speculator is to pay more for each position. Why? Because everyone wants a bargain. It goes against human nature to pay more for each trade. People want to buy at the bottom and sell at the top.

The speculator may choose a different ratio for purchasing the stockthan Livermore’s ratio of 20 percent on the first purchase, 20 percent on the second purchase, 20 percent on the third purchase, and a final purchase of 40 percent. He could, for instance, purchase 30 percent as the first probe position, 30 percent as the second and 40 percent for the final probe position.

In summary, it is up to each individual speculator to decide the ratio that works best for him. Livermore simply outlined what worked best for him. The main money management rule is comprised of three factors:
1. Do not take your entire position all at once.
2. Wait for confirmation of your judgment—pay more for each lot you
buy—dollar average upward.
3. At the beginning of each trade first establish in your mind the total, exact amount of shares you want to purchase if all goes well, or specify the amount of dollars you are willing to commit; do this before you begin the trade.
"If a speculator is correct half of the time, he is hitting a good average. Even being right 3 or 4 times out of 10 should yield a person a fortune if he has the sense to cut his losses quickly on the ventures where he has been wrong" - Bernard Baruch

Disclaimer - The author may at times own some of the stocks mentioned in this forum. All discussions are NOT to be construed as buy/sell recommendations. Readers are advised to do their own research and analysis.
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Re: How to Average UP on wining positions?

Postby winston » Tue Sep 09, 2008 9:52 pm

Hi Lena,

In my May 8 post in the Trader's thread, there is the following about pyramiding:-

19) Build a trading "pyramid". When you add a position (always in the right direction of your trade), make sure that the number of contracts is less than your initial position. Example: If you had bought 4 lots @ $10. The next position could be 3 lots @ $10.05 not 5 lots at $10.05.

Take care,
Winston
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Re: How to Average UP on wining positions?

Postby LenaHuat » Tue Sep 09, 2008 10:38 pm

Hi SanSan, Grandrake, MM and Winston

Thank Q Q a million for your replies. I need some time to mull over this. :lol:
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Re: Averaging UP on wining positions

Postby LenaHuat » Mon Oct 13, 2008 9:57 pm

Gonna re-activate this thread.

Looks like one can have many options :

(1) 50% first; if good, show hand - topping up :?:
(2) linearly averaging up : 25%;25%,25%,25% - boxing up :?:
(3) descending proportion : 50%; 30%; 20% - pyramiding up
(4) 20%; 20%;20% and the remaining 40% - :?: :?:

I'm still sorting this idea out. Can't seem to hve a handle on this. Usually juz use gut feeling.
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Re: Averaging UP on wining positions

Postby winston » Mon Oct 13, 2008 10:17 pm

Hi Lena,

I recalled that in the book " Buy First, Investigate Later", Soros mentioned that you must always have a big position if you are convinced of your story. The question then becomes "How good is your story ?".

I think Soros told the guy,"You call that a position?".

Take care,
Winston
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