We’ve all heard
about Muhammad Ali famous “rope-a-dope” technique. You remember, in
1974 Ali fought George Forman in Zaire in the “Rumble in the Jungle”.
Forman, the favorite, threw punch after punch against Ali. All poor
'ole wily Ali could do was try to prevent damage to himself and hope
that Forman would punch till he was exhausted. When Forman ran out of
steam, Ali started fighting and won.
And what does this
have to do with trading? In these times of trendless markets but
volatility of 50 to 100 or more point swings, we are all getting a bit
punch drunk. It seems as though the market can and does run counter to
any position we have placed.
This method is
something I picked up when reading Jim Cramer’s book
“Confessions of a Street Addict”. It is pretty obvious. When
starting a position … don’t buy or short your entire position. Start
off slowly. You were going to buy $20,000 of PG at 65. Instead only
buy $5,000 or $8,000. PG drops 3-5% buy another $5-8,000. If it drops
more, buy more. If you had bought all of your position at once, as the
stock goes against you, you can not purchase it at a lower price.
This definitely
does go against the idea of “never adding to a loser”. But if you know
the amount of money that you are willing to invest in the stock and
you are still willing to sell if you reach your stop loss point, you
might be able to get that stock at a lower average cost. This way you
can still punch away at that stock and hope that the market runs out
of steam.
And if the stock
takes off after you only bought some of you position. Well that’s too
bad. You only have profits on your hand.
