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The Big Picture (IBD) of 27/5 states that "one way to limit your risk is to buy half your position in a stock, then add shares when it climbs 2-3%, then buy the rest of your position when its up 5%". I understand what the theory is, no problem there. My problem is that, in real life, I will have the stock breaking out but find myself being unable to put this into practice because the stock will be all over the place during the breakout. And as some breakouts last 1-3 days (leaving me behind while I vacillate) and others go sideways endlessly (buy? dont buy? today? tomorrow?) .. I'm in dire need of help with this as I prepare for the correction to end.
Is there anybody who could walk me through a typical breakout or two, and indicate at which points one would put the above rule into practice? Any help with this issue would be appreciated!
I have found scaling into stocks to be the hardest thing as stocks 'always' seem to re-trace below where you made your second buy...it is almost a guarantee that it will happen. I started doing much better when I would make one buy and leave it at that. The other hard thing is that on breakouts many times a stock will rip right thru buypoints so you end up having to make the best of things. I know more people who have lost money or got shaken out due to their second and third buys; whereas buying once makes things much easier to handle IMO. Hope this helps
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Thanks, BigJ! Yeah, I see how the second and third buys would make it easier to be shaken out.Plus trading costs add up, if you're not with a low-price broker. And it's nerve-racking too!
I'm seeing a lot of recommendations for scaling into/out of stocks, though. And since Follow-Thru Days are iffy, (and we're probably going to see one tonight), am thinking that tips on scaling into stocks would have been very useful right around this point. Anybody else care to chip in?
To scale in immediately after the stock went through a pivot takes discipline. The first buy has to be exacly right or even better, at an alternate buy point. In a tricky market it is even more important.
Remember, one does not need to scale in right away. One can make an initial buy and if it works out the next buy can be done at an additional buy point such as a pull back to a support line or 3 weeks tight.
The idea is to be careful with deploying one's capital. One of the great strength's of the CANSLIM system is that it is not just about offense. It is defence first.
I've been struggling with this as well. I can't find a good way to make scaling/pyramiding work the way it's suggested by WON and IBD lately, ie adding when the stock is up 2-3% and then completing the position at 5%. How many people have been sucessful doing this?
For one thing, I can't watch the market all day and I almost never hit within 2% of the ideal buy point, and my later buys are never within the 5% ideal range. But even if I could, my question is what do you do about your stop loss when you add to a position? If you keep it at 8% from your original buy, you will (and I have) lose more than 8% on the total position if you get stopped out. If you adjust your stop loss to 8% of your average cost per share, you could (and I have) been stopped out too early and watched from the sidelines as the stock rebounds into new highs.
It seems that this ends up being a higher risk strategy unless you're in a low volatility, strong uptrend environment when the likelyhood is low of hitting your stop after your 2nd and 3rd buy-in . But in that environment, you wouldn't want to pyramid to begin with anyway. You'd want to take a full position as close to the pivot as possible and watch it run.
The only way to scale that makes much sense to me is to add at later base breakouts or bounces off the 50D line. This theoretically lets me take smaller initial positions in more breaking stocks, and hold more cash to funnel into the winners.
Thanks for the post.
I've suggested it before and please allow me to do so again here. Get yourself the book of Top Stocks of 2010. Mark it up, each chart. Yes, it will take you considerable time. Please, make the time and do so if you're serious about this. Where would you buy, sell, etc. Mark each base that you see. (pencil). Let a few days go by and look it over again.
Then, look at it each month or some frequency that works for you. You have to look at it at this point, and not just flip the pages.
Please do let me know if this works for you; sometime in the later months of doing so.
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