COMPOUNDING A POSITION

At some point, all speculators find themselves adding to, or compounding, their position. Many traders view this as a means of concentrating on those commodities that have more potential. There are two lines of thinking among these traders. When a trade becomes more profitable, it is confirming its move and is thought to deserve more of a commitment than a trade that has not become profitable. On the other hand, by adding positions to a trade at preset intervals, the effect of a single poor entry point is reduced and a better average entry price is created. This latter technique is called scaled-down buying in the securities industry.
The following sections will assume that positions are added based on profitability as a means of increasing leverage. There are a number of techniques used by experienced traders, but the time to add must be carefully selected. The situation chosen must have potential for a long move with limited risk; the sustained consolidation period of a market that is priced near its historic lows would be a candidate. No matter how well chosen, each method will result in the largest holdings at the highest (or lowest) price; when the market reverses, losses occur on a larger base and profits will disappear quickly. Compounding a position is very fragile, hard work and must be watched cautiously for a changing market; there are enough stories of speculators who leveraged small capital into a large fortune in less than a year’s time and then lost it all in a week. As in all investments, the risk balances the opportunities.