Learn the core trading strategy to optimize your profits as the stock price action rises. In this guide, you’ll learn how to trade around a core trade, the methods along with a twist. If you can master the core position trading technique, you’ll become proficient at both long term investing and active trading.
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In trading, it doesn’t matter how good you’re at picking trading opportunities or, how great your strategy is. If you aren’t able to properly manage risk and your position, you’ll eventually end up losing all your money.
Losing money in trading is the last thing we want to do. While some losses will be unavoidable, you'll need to take active measures to ensure your portfolio is performing as desired. In this guide, we’ll go through one of the basic elements of the core trading strategy. Trading around a core position ultimately will help you optimize your profits and minimize your losses.
If you only buy and hold, you’ll have to endure periods of losses when corrections hit the markets. Learning a core strategy trading can be your best technique to tackle market correction in an efficient way.
Before we show you how we trade around a core position let’s start by explaining what is core position trading.
What is the Core Trading Strategy?
The core trading strategy involves taking a primary long-term position aka a core trade and then actively buying and selling shares depending on the price action. In other words, a core trade blends together the power of the long-term buy and hold strategy with active trading.
If you can master the core position trading system you can maximize your profits while at the same time minimizing losses.
The most common way to trade around a core position involves a 3 step process:
- Step #1: buy stock at the initial price which becomes the core trade.
- Step #2: as the stock price increases, scale-out of your core position, and cash in profits as short-term targets are reached. As your position size is steadily reduced, the exposure to potential unfavorable price movements is minimized.
- Step #3: wait for a correction in the stock price to buy back your shares and rebuilt your core position.
So, the core trading strategy cashes in profits as the stock price rise while allowing stock investors to keep a core trade with exposure to further stock price appreciation. The core position is rebuilt by taking advantage of a correction, which would have not been possible with the buy and hold strategy. Check out our guide on buy and hold vs swing trading.
Let’s look at an example and see how trading around a core position really works in practice.
How Does Core Position Trading Work?
Establishing a core trade is one of the basic trading disciplines that you need to get familiarized.
Now, if you want to learn how to frame a core trade here is an example.
Say you have an initial core position of 500 shares of XYZ stock bought at $100 per share. If the stock moves up 10% at $110, you sell half of your position (250 shares), then wait for a correction before you buy the same share back.
With this approach we accomplish three things:
- Lock in profits.
- Minimize downside risk.
- And, at the same time, have some skin in the game by holding some shares if the price continues to appreciate.
If after you bought your favorite stock, the share price drops more without impacting the long-term outlook of the company, you can buy some more shares. For example, if XYZ share price drops to $90, you might buy an additional 100 shares or as much as your risk tolerance dictates.
Now, the downside is that the core trading strategy doesn’t work that great when you own low volatility stocks. Or, when the stock you bought is a high-quality stock that trends steadily upwards.
Check out our risk management calculator.
Let’s examine why trading around a core position can help you adjust your profits.
Why Core Strategy Trading Can Optimize Your Profits
Trading around a core position allows you to keep exposure to your favorite stock while at the same time avoids losses when a correction happens. When you have unfavorable trading conditions, working around a core trade can help you reduce the risk while staying connected to the long-term stock view.
Here is why core position trading works.
The natural ebb and flow of price movement give Smart Money the chance to take profits, which causes pullbacks. In return, retracements give the chance for new investors to buy cheap stocks.
When enough stock buying takes place, the stock price will rise again.
And, the cycle starts all over again.
The core strategy takes advantage of these constant buying and selling pressures.
For example, growth stocks that have long-term potential are good candidates to establish a core trade.
Check here everything you need to know about the growth stock investing strategy.
Now, if you want to take your trading to the next level, we’re going to share with you our method to trade around a core position.
Core Trading Strategy
Most of our systems at Trading Strategy Guides focus on how to pick stocks and trade them methodically.
Now, we want to teach you how to trade around a core position.
The core skilled trades are very useful in crazy and volatile markets.
Now, let’s go through a step-by-step example.
Step #1: Pick a Stock
The first thing you need to choose a stock that you have a strong bias on. Find the stock that you think has the biggest potential to appreciate in the long run.
You can use the CANSLIM method by investor William O’Neil to help you pick the best stocks: How to Make Money in the Stock Market.
For the purpose of this example, let’s use Tesla because we like that stock for long-term investing.
Tesla is a very volatile stock and is a great play for the core strategy trading.
Let’s see how to establish a core trade.
Step #2: Establish a Core Trade
When it comes to buying stocks, instead of investing all your chips at once you should buy in increments. The idea behind this method is to bring the dollar-cost averaging of your position down. Find out how to earn money buying stocks.
Why is this important?
Well, if you’re not that good at timing the market this smart investing strategy will help you purchase the stock at an average cheaper price.
Secondly, if you fear of missing out (FOMO) on market gains, you make sure you have some skin in the game by purchasing increments.
Let’s assume you want to buy 1,000 shares of Tesla.
The way to set it up is to buy 200 shares each week over a period of 5 days until you bought your full-stack. This will be your core position as a stock investor. If you’re a disciplined investor this approach can yield handsome profits.
The average cost for purchasing the 1,000 Tesla shares is $480 per share.
Let’s learn how to scale out of a position and lock in profits.
Step #3: How to Lock in Profits
Once you have a core trade established, we want to start to lock in profits at various price targets. Check out these day trading targets.
In this regard, you can look to sell 200 shares every time the stock price jumps 10% or 20%.
Once Tesla's price reaches $580, you sell 200 shares and continue to scale the same way on that way up.
Note* You don’t want to get rid of all your chips. We’re going to hold on to some shares anywhere between 20% and 40% of our core trade to have some skin in the game for the long-term.
So, you continue to scale off and cash in some profits again when Tesla stock reaches $680, and then some more at $780.
You hold on to 400 shares in case the stock price continues to rise. This gives you some skin in the game.
We wait until a correction or some sort of pullback indicator happens so you can repurchase your full chips.
Step #4: How to Buy Back Your Full Position
Now, we want to re-establish our full position and buy back the same amount of shares we sold at the previous step.
Once the stock is knocked down, we want to make sure the reason behind this sell-off is not because the company has real prospect issues that can affect the long-term gains. At the early stage of a recession, even a stock market crash looks like a simple correction.
So, as the stock price comes down you start buying in the same amount of 200 shares increments. As the stock price continues to slide you continue buying until your full 1,000 share position is established.
Then we repeat the process (step #3) on the way up.
Over time, the stock profits will add up and that’s what trading around a core position is all about.
Obviously, you can scale in and out of your position at a size that it’s more suited to your risk tolerance. The basic idea is to put you in a spot where you own too much shares in case the stock gets hammered or, too little on the table to take advantage of a stock market bullish trading patterns.
Now, the question is whether or not you should trade around a core position or not.
When to Trade Around a Core Position
To answer whether or not trading around a core position it’s good or not it depends on your goals, availability, and risk tolerance.
Having said that, even if you’re a long-term investor it’s a good idea to take some profits off the table. Psychologically this will benefit you. Secondly, from risk control, you’ll better manage the risk.
There are no certainties in this business, as the market can always turn against you and your unrealized profits can vanish away.
So, you should trade around a core trade if you’re psychologically prepared to play this back and forth game of getting in and out of the market. Secondly, you should find high volatility stocks that have strong underlying fundamentals. This will ensure you get plenty of corrections while the overall bullish bias remains intact. Here are some options strategies for high-volatility stocks.
Final Words – Core Position Trading
In summary, the essence of core position trading is buying shares of your favorite stock at lower prices and scale-out when the stock market rises. The core trading strategy will help you optimize your profits by profiting from short-term price movements in the stock market while holding a long-term position.
Core position trading is an important core strategy that can be implemented across all asset classes (forex volume, commodities, futures, options, or cryptocurrencies). Now that you know the basics of core position trading you can start generating a lot of small gains that in the long-run will add up.
To wrap things up, here are the 3 advantages you get by trading around a core position:
- Optimize gains and successfully make profits during market corrections.
- Maintain all the time some skin in the game to capture long-term gains.
- Effectively lock in profits and reduce risk as to the stock price rises.
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