With the return of volatility this past week it is a good time to focus on how active trading can help us produce superior returns.
Trading is often characterized as making a single buy of a stock and then quickly selling for a profit. While that often is quite effective it is possible to generate much biggest profits by trading around a core position in a stock that you favor for both technical and fundamental reasons.
Trading around a core is the process of taking a longer term 'core' position but then buying and selling shares as the stock develops. It is a way to take advantage of how risk shifts over time and it also allows for diversification by time frame. When you trade the same stock in various time frames you can hold a much larger position in a single stock at times. It is a good way to make more concentrated bets but to still have some level of diversification.
The first stop in the 'trading around a core position' process is to find the right candidate. It is often a good idea to quickly take a position when the price action catches your attention and then do further research. Having some skin in the game tends to change the way you view the stock and will push you to take further action.
Start looking for the initial setup. Are you anticipating a breakout through a certain level, looking for a bounce off resistance, anticipating a reaction to news? What is the setup and what is the potential catalyst. As it develops you will want to increase your position size enough so that you can sell some if the catalyst triggers and there is a positive move. Plan to reduce your position quickly if it works but make sure you have enough to make it meaningful.
The next step is key. You take some partial profits into the strength. You reduce that position size and cut your risk but if are you still positive about the long term prospects you start to look for the next setup. You may find that it a good idea to jump right back in and chase the momentum. You may even have to pay more than what you sold for a short time ago. That is ok. That isn't an important issue. The issue is being flexible and staying with a good trade.
You may find that the initial trade is over, and you have to wait patiently for another setup to develop. A good stock will take a short rest and be ready to go again but sometimes when there isn't a catalyst it can take a while for things to develop. I have found that if I sell my position completely I will lose track of the stock and will likely miss the next chance. If I keep a position I will monitor more carefully and can act more timely as it develops.
Here is an annotated chart of HTG Molecular Diagnostics (HTGM) which shows how I have been trading this stock since taking an initial position:
Trading around a core position allows you to focus your energy and your capital on the best ideas. To make the big money you have to make concentrated bets when the odds are in your favor. Trading a core position will help you do so.
