In general, buying on a pullback is difficult—and nerve wracking—because nobody knows when the pullback stops pulling back. As portfolio managers, we know better than to try to predict a bottom. We can only look at the facts of the present moment and apply what we have learned in previous trades.

 

There are two reasons to buy on a pullback: To initiate a position and to add to an existing position. First off, adding to an existing position is preferable because initiating a position on a pullback has a much lower probability of success than buying properly out of a sound base breakout. Investors who initiate positions on pullbacks, more frequently than they add to existing positions, have a bigger issue to address: Why are they missing the lower-risk entry points in the first place?

                                                                                                                                                                         

Today, I had to ask myself a version of this question. I initiated a position on a bounce last week, which was immediately profitable until today. By the time the position was closed out today, I had about a 4% loss on it. As I reflect on this trade, the real reason I gave back profits was because I underestimated the stock’s potential and decided to pass on the initial breakout.

 

I may attempt to initiate one, maybe two positions fairly soon, but I am primarily looking to add at this point, if the market allows me. In a perfect world, we wait for volume confirmation of support before wading in.

 

In short, buying on pullbacks is primarily for adding to already established positions. If you are trying to operate primarily by buying on pullbacks, my humble opinion is that you try a new strategy. Buying high and selling higher is a far better road to profitability.

Best Returns,

Scott O'Neil

Follow Scott O'Neil at Twitter.com/WScottOneil