Ask Colin

Once a stock moves into profit and makes a new high in the trend, so that the protect profit stop can be raised, is it appropriate to add to the position?

This is partly addressed in my trading plan, as explained in detail in the videotape of my seminar.

Basically there are three considerations here:

1. Diversification. I limit how much I put into any one stock to limit specific risk. Once I have reached that limit, I will not add to the position. Indeed, if the stock keeps rising far enough, I will start taking profits.

2. Position Building. Until I have reached the maximum I am allowed to put into only one stock in my trading plan, I will add to the position on new highs in the trend, providing the money management rules on position size allow me to.

3. Pyramiding. The idea of pyramiding is to reinvest unrealised profits into building the position. I do not do this, but that is my trading plan. When building my position, I do not factor unrealised profits into the position size calculation for the stock concerned. However, to the extent that the position size calculation is also based on a fraction of my total capital, which will be marked to market, there is an indirect pyramiding element.