Trading

Trading Note #7: Entering into a Position

Since my capital currently is very limited (no spare cash sitting around like a $40bn cash hoard =), everytime I want to enter into a new position, I typically have to sacrifice an existing one.

The usual question that pops up is — at what price should I liquidate my existing position? I realise that I typically have been unable to make that sell decision and precious time and opportunities slip by without any action.

I think there are two main decisions

  1. Do you want to switch? That decision should be made based on comparison between the expected rates of return for each alternative, using a long-term price target for each.
  2. Should I sell NOW? That decision should be made based on comparison between the immediate-term (intra-day) expected rates of return for each option. For example, say from the start of trading day until now, the stock has been fluctuating up and down between 10.00 – 10.50. The price right now is 10.00, hence the short-term potential gain is say 5%. For the alternative, a judgement call has to be made on the possible immediate gain that can potentially happen. If that is more than 5% (with appropriate probability), then you should sell NOW. If that is less than 5% then you can possibly wait for the existing position to go up from 10.00.

Of course, there is the possibility that the existing position might break lower. In that case, a sale of the existing position should not happen, since the short-term potential gain has increased even more.

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