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Pyramid buying

The Chase is On
Stocks go up usually because large numbers of traders and/or institutions are buying the stock.  The Russell small cap index is currently breaking out to all time highs; the NASDAQ looks like it may break out as well given that it closed at the high and above resistance on Friday.  This means that many stocks may be getting ready to make some big runs and some have already started.  For this reason we want to be cautious about buying stocks that are rapidly moving away from us. In a bull market we can afford to take a little more risk and buy breakouts but until we are sure that the Bull has returned buying the pullbacks instead of the breakouts is by far the better risk/reward level.  Money can be made in stocks by buying stocks prior to a sudden move you do not have to chase a sudden move up.  The time to buy is when the stock is just breaking out or when a leading stock pulls back to a support area. 

The one possible exception to this may be if there is some very positive news that has caught the markets off guard and/or if the news is so outstanding that there is a high probability that the stock may benefit from a multiple day run.  Keep in mind however that a sudden move in a stock is often quite different than a change in the overall trend. Sudden moves tend to reverse and if you get into the habit of chasing stocks that are moving up and have yet to break their down trends you will often end up over paying and/or getting caught in a downward move shortly thereafter. 

Generally people that buy late are buying on pure emotion; greed and fear. Greed that they may make a lot of money very quickly and fear that they may miss out should they not get on board. Those are the two worst reasons to buy anything. True you may miss out on the stock however in most cases it is better to wait and find another stock than to pay up too much.  Patience in the stock market is very important; usually you will do better by avoiding the temptation to jump in with the crowd or buying on impulse as result of a sudden move up. 

Average Up Not Down
Often time's stocks will give you many chances to get into them at current or sometimes even lower prices. Generally there are few cases that require sudden action if you are really careful in how you trade. Sometimes the best trades are ones in which you wait patiently for the stock to come to you.  If you feel the need to rush in to buy a stock it is sometimes a warning sign that you are acting on impulse and not on a well laid out plan for the trade. Keep in mind as well; it is often not a bad idea to take up positions in a trade little by little. For example if you plan to own 1000 shares consider buying 500 shares and seeing how the stock acts.  If you are right and the stock moves up 5% you can buy more maybe 300 more shares and then if the stock continues to move up you can buy the last 200 shares. This way you have purchased your 1000 shares and most of them are at lower prices.  This is called pyramiding up and it prevents you from jumping in all at once. 

The Great Pyramid
By averaging up with fewer shares each time you are building a sound base in the trade.  Think of it like the Great Pyramids of Egypt.  The trade will be wider at the bottom than it is at the top and a lot more solid.  Be careful to only buy an equal number or less than your first purchase.  If you buy more shares than your first purchase your average cost will be much higher and the trade is considered top heavy and you want it to be bottom heavy.  If you are top heavy having more shares at higher prices than your original purchase you will lose at a much faster rate should the trade go against you.  You want to keep your average cost down as low as possible while the trade is working in your favor. The higher your cost basis the quicker you will be under water if the trade goes against you.  It is always better to average up (not down) but you need to average up the right way by keeping your cost basis as low as possible.  By averaging up; you are on the right side of the trade.  You have given the stock a chance to prove itself and it has done so by moving in the direction you had planned it is only at that point that you should consider purchasing more. 

Stocks Are Like Employees
At no time should you average down if the trade goes against you.  If you buy 500 shares and your plan was to buy 1000 but the stock drops 2 or 3% then you are better off cutting the losses instead of buying more shares.  Remember if the trade is not working like you had planned there is no reason to put more cash into the trade.  Especially in a bull market when so many stocks are going up.  You are better off using that cash in another trade.  There is almost always another working trade that you can put the cash into.  If this is truly a bull market ready to start there is no reason to hold any trade that is not working.  Think of it a







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