Cool Trading Tip: Legging In

What I want to know is, how do they know it’s me trading? It so often seems that my trade, my lowly little trade, moves markets into huge swings, always against me. It’s uncanny how that works. With the millions of shares trading every day, it seems that it is my purchase of call options that suddenly causes the market to collapse. My trade… just has that much power! I feel I can kick up the dust in the southern Dust Bowl, cause tsunamis in the Pacific or droughts on the prairies. If I yield this much influence, how can I channel it to cause my beloved Buffalo Bills to actually win a Super Bowl this year?

There is a way to combat these turnaround trades, which I know not only happen to me. But to begin, it is not really you or I who moves the market; we just happen to be at the wrong place at the wrong time. The market is the collective mindset of all the investors, traders and speculators playing in this arena at the same time. I often think we are bunch of insecure people with lots of money trying to one up each other but instead, follow like sheep.

Truth be known, it is highly unlikely a single individual can have that much of an impact. Perhaps we should, if possible, be astutely aware of the opinions of the masses but stand apart from it. Of course, this is easier said than done.

My little secret is this: as an example, if I am prepared to spend, say, $10,000 on a trade, I only would buy 10 contracts at first. It may cost me $3,000, leaving me with $7,000 with which to leg in later to bring my average cost down as a repair. I never invest the total amount I am prepared to pay. But I will start small. If the stock runs in my favor, I will ride it up and take profits as they unfold.

However, when the stock turns against me, which happens all too often, I have that cushion with which to bring down my costs. That enables me to exit at a much lower price than I otherwise would have. Often, the waiting and hoping results in a loss.

Legging in is not a new concept. Some traders like to leg out as well, taking gains to cover their costs and letting the rest run up greater gains. I personally like to exit my entire position; hence I do not leg out but sell it all.

Legging in, or averaging down, is also a preferred way to repair trades that have gone bad. No matter how well we analyze, turn the news inside out and unpack the fundamentals, the market is what it is and it is always right. It will never bend to our desires; we have to conform to it.

This is one form of money management, and a proactive method of ensuring that I am able to trade again tomorrow. Managing your capital is paramount and requires full on discipline. Never invest more than you can afford to lose and no matter how strongly you believe in the trade or how sure you are of a move, never invest it all. Keeping a reserve ensures that I have the funds to repair a position and gives me the mental cushion I need to stay with the trade, should it turn on me.

It happens all too often that the market reverses as soon as I place my order. One client I mentored years ago considered waiting a few seconds as he was about to enter a position, and then buy the opposite. This was because he felt the paranoia stemming from this market nuance. He often wondered if it was he who was causing trend reversals. I assured him he was not, unless he was trading many millions of dollars at the same time, as that could be the only way he could have such an effect.

If you ever feel such market-moving paranoia, we cannot stress enough the importance of joining our Trading Room, your facility for ongoing education. Ahren and I provide you with over 40 years of experience, an exposure to the market you can never find or afford anywhere else.

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