Friends often ask me, how to add to a position, how to reduce a position? Are there any technical means to increase profits?

In fact, there are certain skills to adding and reducing positions. If done well, it can not only increase profits but also reduce the pressure in our trading, achieve a stable mindset, and enhance execution.

In today's article, I will discuss in detail the significance of adding and reducing positions, as well as several practical methods for adding and reducing positions, to add value to everyone's trading strategies.

The content is very dry, so it is recommended to save and read. If you feel you have gained something, you can give the article a like, thank you.

1. What is adding to and reducing a position?

It's very easy to understand. Adding to a position means that when we hold an order, we continue to buy more and increase our position as the price of the commodity goes down or up. This is adding to a position.

Reducing a position means that as the price of the commodity in this order goes down or up, we close part of the order and reduce our position.

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The strategies for adding to and reducing positions are also divided into adding to a winning position and adding to a losing position, which I will explain in detail in the following article.

2. Why do we need to add to and reduce positions?

Firstly, adding to and reducing positions can increase profits.All market trends are characterized by fluctuations, with constant oscillations and retracements during the process of rising or falling. If we can accurately grasp the high and low points of market phases, we can maximize profits by adjusting our positions through adding or reducing trades.

Starting from the market's launch point at 1753, up to the high point of the market at 1831, the market has moved a total of 780 points. However, between the launch point and the high point, there were oscillating retracements. If we can seize the high and low points of the market phases and adjust our positions accordingly, the 780-point upward trend can be broken down into three segments: 610 points, 330 points, and 400 points, totaling 1340 points.

Comparing 780 points to 1340 points, the potential for trend space expansion is nearly doubled. If the operation of adding or reducing positions is done properly, the profit space can be significantly increased, enhancing the efficiency of trading.

Secondly, adjusting positions can alleviate the pressure in trading, stabilize trading psychology, and improve execution. The operation of adding or reducing positions can reduce psychological stress in trading. For example, when an order is in profit, we can reduce some positions to lock in part of the profit first.

Once we have secured some of the money in our pockets, subsequent trading will be more relaxed, and our execution will be greatly improved.In the example from the image above, the first wave of the market rose from 1753 to 1814, a gain of 610 points. However, the subsequent deep correction (indicated by the blue arrow on the left side of the chart) retraced a full 300 points, causing a significant portion of the profits to be given back.

The second correction on the right side of the chart (indicated by the blue arrow on the right) is even more exaggerated. The market rose by 380 points but corrected by 280 points.

At this point, if we reduce our position at a high level and see the market correct, our psychological state might feel a bit of glee, thinking that we have avoided losing a lot of money and thus gained a significant psychological advantage.

Trading is essentially a competition of who has a steadier mindset and better execution. By reducing our position, we can maintain a sense of security and not panic.

However, there is one point to note.

The examples we provided above are based on the high and low points of the market. In practice, we cannot reduce our position at the highest point every time, and there will be some mistakes in judgment. This is normal and is the tolerance for error that a trading system should have. However, this does not affect the overall profit potential and psychological advantages brought by the strategy of adding or reducing positions.

3. Several methods of adding or reducing positions

Let's start with adding positions: The operation of adding positions is mainly divided into two types, profit-taking addition and loss-taking addition.

The first type, profit-taking addition.

Profit-taking addition is when we add to our position after the order has generated a profit.There are two most common methods for adding positions when in profit: one is breakout addition, and the other is pullback addition. Let me explain each with pictures.

(1) Breakout Addition.

Breakout addition refers to the situation where we have an open order that is already in profit, and the market forms a new high or low point in the direction of the trend, and we add to our position at the breakout point.

In the middle of a downtrend, when holding a short position that is in profit, we add to our position when the market breaks lower after a pullback, as indicated by the blue circles in the diagram which mark two opportunities for addition. The stop loss for breakout addition is usually set at the high or low point of the pullback.

(2) Pullback Addition.

Pullback addition is when we have an open order that is in profit, and the market retraces. We add to our position at the end of the pullback, where the market might reverse.

In an uptrend, when holding a long position that is in profit, and the market pulls back, we can add to our position when the pullback tests near the 50% Fibonacci retracement level, which also coincides with moving average support. When two technical indicators resonate and a reversal candlestick pattern forms, it is an opportunity to add to our position.

Each of these addition methods has its pros and cons. Breakout addition is a right-side trade, while pullback addition is a left-side trade. Breakout addition is more aggressive, while pullback addition is more conservative.Some traders also combine these two methods of adding positions. First, they add a position at the end of a market pullback. After the position is added, as the market starts to rise, the added position is already in a floating profit. Then, when the market forms a breakout, they add another position.

The second method is adding positions in a floating loss.

Adding positions in a floating loss refers to the operation of adding positions after our orders enter the market and a floating loss is incurred. When the market falls and first tests the daily support at 13.9, a reversal candlestick is formed, and a position is opened. After that, the market rises in the short term and then quickly turns bearish, resulting in a floating loss on the order.

After breaking through the support at 13.9, the market formed a reversal hammer candlestick, indicating an expected reversal. At this point, a position is added, and then the market starts to rise. By adding positions in a floating loss, the success rate of orders can be increased. Originally, one opportunity at a single point is increased to two or even multiple points, turning the entry point of an order into a range. This increases the tolerance for trading opportunities.

A high success rate of the trading system is of great help to the mindset. It boosts trading confidence, strengthens execution, and is conducive to profitability.

There are several very important points to note about adding positions in a floating loss:

(1) Strict stop-loss must be enforced.

Adding positions in a floating loss is similar to contrarian position-adding in trading. The biggest problem with contrarian position-adding is that when encountering a one-way market in the opposite direction, if positions are continuously added, the orders can incur severe losses. This mistake must be avoided at all costs.Therefore, the number of times to add positions when facing unrealized losses, the proportion of positions, and the stop-loss levels must all have clear standards and be strictly implemented.

(2) Stock trading is more suitable for the operation of adding positions when facing unrealized losses.

Stock trading does not involve leverage, and grid trading methods in stock trading are designed according to the logic of adding positions when facing unrealized losses.

In leveraged markets such as forex and futures, try not to exceed three times when adding positions with unrealized losses, and the proportion of positions must be reduced.

Now, let's talk about reducing positions: Reducing positions is also divided into profit-taking reduction and loss-reducing reduction.

The first type, profit-taking reduction.

Profit-taking reduction refers to when our held orders are in a profit-making state, the market reaches a relatively high level of profit, or it reaches a more significant resistance level, we reduce our positions to lock in some profits. After reducing the position, we observe the changes in the market and then proceed with the next steps.

After opening a position at the support level of 13.9, the market unfolded a fluctuating upward trend, with the price testing the previous level of resistance at 17.64 and forming a series of consecutive reversal candlesticks. There is an expectation for the market to pull back downward, and at this point, we reduce our position to lock in some profits.

After profit-taking reduction, we have locked in some profits, creating a moat of profit in our account, which reduces the risk of trading.After the risk is reduced, our fears and worries will also decrease, and the psychological pressure will naturally be lessened, making the execution of trades more composed.

The second method is to reduce position size when there is an unrealized loss.

Reducing position size when there is an unrealized loss means that when our orders are in a floating loss, we reduce a portion of our position to lower the risk. After reducing the position, we observe the changes in the market and then proceed with the next steps.

After the left-side market goes through the bottom oscillation and breaks through the neckline, we open a long position with a stop loss set at the previous low point.

After the order enters, a downward channel line break is formed at the 15-minute level (right side of the chart). When the channel line is broken, there is a possibility of the market moving downward. At this point, we reduce the position size due to the floating loss. After reducing the position, the market falls significantly.

(In such a significant downward market, because the position was reduced at a higher level, the floating loss from the decline is smaller, giving the trader a significant psychological advantage)

Reducing position size when the market is unfavorable can lower the risk of holding positions and the loss of capital. With reduced losses, the psychological pressure of trading is also lessened, leading to a more stable mindset, which is conducive to trading.

When the market is unfavorable and there is a floating loss, reducing the position size can lower the risk. If the market then forms a favorable pattern, we can continue to add positions, making up for the lost positions. Below, I will explain an example of combining adding and reducing positions.

Combining adding and reducing positions.

In practice, we usually combine adding and reducing positions together, using them flexibly according to market changes. This section of the trend is a continuation of the previous section. After breaking through the 4-hour level on the left, when the 15-minute upward channel line is broken, we reduce the position size due to the floating loss.After reducing the position, the market fell sharply and formed a consolidation at the bottom. Subsequently, the market broke through the red downward channel, creating an expectation for a reversal upward. At this point, it is advisable to increase the position, making up for the positions that were reduced at a higher level.

4. Precautions for Position Sizing Adjustments

Firstly, we must conduct position sizing adjustments in a structured manner. The operation of increasing or decreasing positions cannot be based on immediate whims, as encountering some volatile markets may lead to a loss of emotional control. Therefore, it is essential to establish rules for position sizing adjustments, integrating them with the trading system.

Before engaging in actual combat, it is necessary to verify the effectiveness through backtesting or simulation trading before execution, and not to change the strategy of position sizing adjustments arbitrarily during the execution process.

Secondly, position sizing adjustments can be used independently or in combination. If one must choose to use one of them, I would recommend reducing the position. This is because reducing the position can lower the risk and alleviate the psychological pressure in trading, which is more conducive to the execution of the trading strategy.

Thirdly, do not pursue the perfect points for adding or reducing positions. This is an old problem for everyone. The operation of increasing or decreasing positions is based on the existing trading system, serving as an enhancement.

If your original trading strategy is flawed, adjusting the position may even exacerbate your losses. Therefore, one should not pursue the absolutely perfect points for adding or reducing positions here.Our overall pursuit is to see an increase in profitability, not necessarily a significant one, but a moderate one will suffice.

Fourthly, the strategy for increasing or decreasing positions should not be too complex, otherwise it will be unexecutable.

Simplicity is the ultimate sophistication. In the end, we still need to operate it ourselves, not just for show. Therefore, whether it is the trading system itself or the rules for increasing or decreasing positions, they must be based on simplicity and ease of operation.

Clear standards and consistent operations are the true way to add the finishing touches.