Good Stocks to Buy
May Be the Ones You Already Own

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When to Add to a Stock Position

Scaling

Good stocks to buy may be some of the ones that are already in your stock market portfolio. Imagine for a moment that the stock market has begun to trend upward and so have the prices of your current stock positions. So, how do you know which good stocks to buy more of to add to your portfolio?

Knowing when to buy more stock of a position you're already in is called scaling or leveraging into a position, and it can be a part of any good stock trading plan. Scaling into a position is a great way to further manage stock trading risk and increase gains too, especially if you have money continuing to come in to build your portfolio.

The key is to have strategy rules for adding to a stock position so that when a price sets up for another burst of upward action, you’re ready. Like finding any good stocks to buy, adding to a stock position is not an arbitrary action, but a calculated strategy for increasing a holding.

Some advocates of adding to a stock position say to do so when a stock “pulls back.” The problem with this strategy is, how do you know when or if the stock price will move upward again? Downward movement is price weakness. Never just add to a losing position because you think the price will bounce back up.

There is a situation where I would recommend buying at a pullback. It’s a strategy used by swing traders and requires some familiarity with Japanese Candlestick formations.

In this facet of swing trading, traders wait for the price to recede and look for a Japanese Candlestick formation called a "hammer." A hammer formation occurs when the tail or wick drops below the 30-day

moving average with higher volume than the prior day. This is a signal for an entry on the long side, and for longer-term investors adding to a position, the stock should have previously been in a trend like in the examples of IDT and MHR below.

For placing more capital into an already-owned position, the very first criteria I use is to wait for a stock to have gained 7-10% from my purchase price. I want to see those initial signs of a real gainer in what I think are good stocks to buy. To put it in perspective, this is a stock that is at the beginning stages of an up trend. It’s important that it’s truly at the beginning of a trend and not at the very end of a strong trend or what’s called an exhaustion point.

Take a look at IDT and MHR:


In the first example of IDT, the formation is a quick signal for the turnaround upward. But, in the example of MHR, it's almost three weeks before the upward burst of action. A good buy signal is when the stock's price closes above the signal day's price high.

One should be convinced that a stock is showing real strength before buying it for the first time or for buying more of it. Be willing to give up a few percent of a strong gain for a stronger confirmation.

Look at whatever technical signals you use to find good stocks to buy along with price strength for your initial entry. You should see some revival of those same indicator setups. I use either upward movement of the +DI (7 day), ADX (7 day) and/or a higher Rate of Change (ROC) (7 day) rating.

I like to see the ROC above 0 and rise to a second higher rating for my first entry. It's a really great indicator for price strength. After I’ve entered a position and it’s gained some I look for the ROC to rise above it’s prior high again. Also, if I have a couple of choices for scaling more in on a single day, I will lean more toward the stock with stronger volume.

Below is a terrific example of a good stock to buy (twice) where scaling in would have worked really well. In the example of BANR, an initial purchase was made at $3.23, and a second purchase was made at $3.80. The price rose up over $8 and gave a signal just under that mark for a tight stop based on a Japanese Candlestick formation. One could have been stopped out at approximately $7 using an Average True Range (ATR) stop and locked in a gain of 116% and 84% on the two purchases.


One question to ask yourself is how many times to add to a position. You don’t want to be over weighted in any one position so you should determine how much capital will be placed in any one position as is discussed in position sizing and then scale in however you are comfortable. It could be equal amounts entering two times.

As a reminder, scaling further into positions stops when the market shifts into a non-trending or down trend even if a stock meets the criteria. Stock market trend will always help you to make better entries.

If good stocks to buy are already in your portfolio, than you know you're really doing something right with your stock trading and purchasing more of a position can be a great way to continue to build wealth.

ACTION STEP: Decide if you will buy more of a stock that's already in your portfolio. If so, write out your rules for buying more of a stock and add them to your trading plan.

Return from Good Stocks to Buy May Be the Ones You Already Own to Stock Trading Systems.


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