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2024/10
Techniques for Incremental Position Building
In the investment process, reasonable position building is the foundation for reducing costs and maximizing profits. So, how can one build positions rationally ? What are some effective techniques for building positions ?
01. The Principle of Incremental Position Building
When discussing position building, investors often overlook a crucial principle: incremental position building. Many believe that with limited funds, making a single purchase is simpler and more convenient, and similarly for selling. Generally, this approach has its drawbacks—once a decision is made, there is little room for recovery.
With incremental position building, there’s a greater chance to accumulate shares at lower prices, which helps to average down costs while also capturing better “opportunities.”
The same logic applies to incremental reduction of positions. This approach not only helps manage risk but also ensures substantial profits. Overall, the benefits of incremental position building or reduction include:
- Avoiding prediction errors caused by “false signals” (e.g., “bull traps” and “bear traps”).
- Reducing acquisition costs while managing risk.
- Ensuring investment returns while managing risk.
Note: Incremental building is applicable under stable market conditions, excluding sudden events such as sharp rises, drops, or flash crashes.
02. Techniques for Incremental Position Building
There are several methods for incremental position building: the Index Building Method, the Pyramid Building Method, and the Equal Division Building Method.
Index Building Method:
This method involves increasing the buying power as prices decline and reducing the position size as prices rise.
For example, if the asset experiences a pullback during an upward trend, the investment funds can be divided into ten parts. The first purchase could be 1 part, the second 2 parts, and the third 4 parts. Conversely, if investing during an upward trend, the approach would be from larger to smaller increments, like 4 parts, 2 parts, and 1 part. Essentially, it follows an exponential function for positioning.
This method requires careful use, as the incremental investments increase exponentially over time.
Pyramid Building Method:
Similar to the Index Building Method, this approach involves increasing the buying power as prices decline and decreasing the position size as prices rise. However, it’s important to note that the increments for the two successive purchases differ significantly, generally following an arithmetic progression. For instance, when chasing a rising asset, the increments might follow 30%, 20%, 10%, etc. If the asset pulls back during an upward trend, the increments could follow 10%, 20%, etc.
This method is particularly suitable for capturing strong momentum in trending assets, next only to leading stocks.
Equal Division Building Method:
This method involves dividing funds equally and participating in position building as profits align with the trend. If there’s an opportunity for additional purchases, the investment is also made in equal parts.
Given its moderate approach, this method is suitable for risk-neutral and risk-averse investors, especially in fluctuating market conditions, making it ideal for high selling and low buying strategies.
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