Position Building Technique

You may want to go into a trade but find your entry level isn't perfect. It might have already bounced off the low points a bit and isn't as low as where you'd ideally get in. Alternatively it might have not yet hit your precise support level but already seems keen to move off without quite making the "perfect" technical formation.

In these situations you can use a technique known as position building...

Opening

Example - You think the FTSE Rolling Daily is going to rise from 4200 and you want to trade £2/point on it. It's trading 4222/23 having already bounced off the lows of 4200. You missed the opportunity to buy £2/pt down at the lows but still want to enter the trade, so you buy £1/point at the 4223 level and prepare to position build.

Position Building at a Cheaper Price

You are in the trade with half your stake so if it continues to go up without returning to the 4200 lows, you've managed to get in without exposing yourself to an extra 22/23 points of risk. You are also in the advantageous position whereby a return to the 4200 lows will not heavily threaten your P+L (because you're only in for half your usual stake) and you can buy another £1/point, build your position, at the cheaper price (e.g. 4201) ready for when your anticipated move occurs.

Why?

This additional £1/point lowers your aggregate trade entry price from your original 4223 entry and means that you can now break even at a lower level, 4212. Anything above 4212 is now profit at a rate of £2/point.

Note that anything below 4212 is a loss at a rate of £2/point, but because you would have ideally been trading that stake anyway, you are comfortable with that.

Position Building at a Higher Price

Let's imagine now that after buying the first £1/point @ 4223, the FTSE continued to go up instead of dropping to 4200. To get back to your preferred £2/point exposure you buy another £1/point to build your position at a higher level, maybe 10 or 20 points higher than your entry point. (e.g. 4243)

How?

The exact level isn't so important but you can build your position once you are confident that a return to your original entry price of 4223 is unlikely. This is usually when the upward momentum has become evident and you are in the middle of the rally you anticipated from the start.

Points to Remember

• Position building increases overall exposure, but this is what we're looking to achieve.
• When building at higher prices the break-even price for the trade rises to become the average of the entry prices. (e.g. 4233 from the example above)
• Wait until the momentum really is with the move, reducing the chance of the market returning to your higher break-even point.

The information in this article is for educational purposes only, it does not constitute advice and should not be construed as solicitations of any order to buy or sell. Past results are not necessarily indicative of future results.