Improve Your Returns By Feeding Best Stocks, Starving Laggards
Once you've identified your top performer, you want to add shares at key intervals. The market's top-fuel stocks are where the real money is made. Plowing more cash into those leading stocks is called the force-feeding method of managing a portfolio.
To fund additional buys, sell your underperforming stocks. Those are the ones treading water or showing a small loss. Your money is better used on better performers.
When you buy extra shares, do it at points where there's less risk. A leading stock will offer new buy points as it rises from its breakout. One of the most common is the first or second time the stock pulls back to its 50-day moving average and finds support there. The pullback should occur in light volume. If the price holds near the 50-day, you may buy more shares as the stock rebounds.
Another good spot is when the stock makes a 52-week high or clears a short-term consolidation such as a base-on-base or three-weeks-tight pattern.
Keep in mind that any time you're adding to a position, you should buy a smaller number of shares than in the previous purchase. If you bought 500 shares as a stock broke out of its base, you'd buy, say, 200 shares on the pullback to the moving average. On the next purchase, buy 100 shares. By "pyramiding" up your position, you're concentrating your cash in your biggest winner.
Conversely, trying the opposite tack -- the "averaging down" method of buying stocks as they're falling to get a lower average cost -- can be risky. Stocks that fall in heavy volume tend to keep falling. If you try to grab stocks on the way down, you could get cut by the falling knife.
