It takes a little practice, but you can reduce the cost basis of your long-term core positions by placing strategic trades in line with price action.
Can you pat your head while rubbing your stomach? That’s a little what trading around a core position can feel like. I vividly remember the first time a kid in elementary school asked me if I could do it. He seemed to have no problem patting and rubbing at the same time, but when I tried, it felt unnatural—as if the two actions were working directly against each other.
Trading around a core position is exactly what it sounds like: holding a primary position while buying or selling smaller positions in the same stock, depending on current price action. If you can master the technique, it can be a valuable tool in your trading arsenal—much more so than patting your head.
Let’s look at an example. Say you have 1,000 shares of XYZ stock at a cost basis of $100. If the stock moves up and hits $110, you might sell 250 shares, then wait until price heads down before buying the shares back.
Conversely, if XYZ drops to $90—and your long-term bullish viewpoint is still intact—you might buy 250 additional shares of the stock, then sell them when the price recovers.
Does it seem as if these trades are working against each other? Well, they are—but for the common goal of reducing your cost basis on the core position. Over time, if you get the hang of it, you can use this approach to attempt to bring down your cost basis.
The technique works best when you start with a position that you plan to hold for a long time. The shorter the time period, the fewer “satellite” trades you’ll be able to make, and the less impact they’ll have on your core position.
Technical trading is a major component of this technique, but it’s best to start with a stock that has strong underlying fundamentals. Good candidates for your core position include stocks that have a long history of earnings and revenue growth, as well as regularly increasing dividends. Make sure you have a strong conviction as to the long-term direction of the stock.
The initial position should be created patiently—buy in measured amounts. By accumulating the core position over time, you’ll be able to get a feel for the individual characteristics of the stock. That will help when it comes time to trade in and out.
Be forewarned: this is going to feel strange to you at first. You may be tempted to sell your whole position on a move up or to "double up" on a move down, but fight those urges. Remember, your goal is to take advantage of fluctuations in stock price for the long-term benefit of the core position—not to maximize short-term profits.
Once your position is complete, it’s time to decide what criteria you’ll use to buy and sell around it.
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