The Art of Position Management: Save Your Bullets for the Right Time

I promised to write about position management before, but I didn't have time until now. Today I'm making up for it.

After trading U.S. stocks for a while, you'll realize a harsh truth: What often ruins an account isn't stock-picking ability, but position management skills. I'm sure you've heard this many times: "Can I still chase this one? Should I average down on that one?"

But actually, the question should be: At this price, how much are you willing to risk? How much loss can you tolerate if you're wrong?

I. The Core Logic of Position Management

Going all-in is exciting, but it essentially bets all future opportunities on the fantasy that this one trade must be right. As we all know, a gambler's mentality won't make you good at trading stocks. Of course, staying completely in cash while watching the market rise daily is safe, but you're giving up the compounding opportunities the market offers.

This is where position management becomes crucial. Its logic is: It's not about whether to gamble, but whether the risk-reward ratio of this trade justifies the risk, and how much drawdown you're willing to accept at this price for this stock.

Simply put, position size = pricing of risk.

The more uncertain and volatile the market, the more conservative your position should be. Only when trend, logic, and valuation are all on your side do you qualify to increase your stake.

II. Scaling Into Positions

First core principle: Scale into positions. Turn bottom-fishing and averaging down into a controlled system rather than emotionally throwing money at it.

Example: Suppose there's a stock you've researched extensively. You believe its fair value is around $10, and it's currently oscillating between $9-$10. You're bullish on its medium-to-long-term prospects, but the short-term trend isn't confirmed yet.

Step 1: Test position (30%)

Around $9.5-$10, take a 30% position to test. If your judgment is wrong, the stop-loss only affects this small 30% portion, leaving your capital structure intact.

Step 2: Buy on dips (20%)

If the price pulls back to the $8-$9 support level due to sentiment fluctuations but fundamentals haven't deteriorated significantly, you can average down to 50%.

Step 3: Flexible reserve (10%)

In extreme cases, if it drops below $8 (e.g., $6) and you're certain it's just panic selling + short-term factors, use the remaining 10% flexible reserve.

After these three steps, your total position is 60%, with an average cost around $8.5. If the price doesn't return to fair value soon:

—Worst case: Price keeps falling to $6 without rebounding. Your max floating loss is ~30%, but since you're not all-in, your overall capital remains manageable.

—Better scenario: If price rebounds from $6 to ~$8.5, your position approaches breakeven or even slight profit.

This strategy essentially trades scaled trial-and-error + controlled drawdown for a "break-even or profit with just a modest rebound" structure. You don't need perfect timing—just survive long enough for the market to correct.

III. Staggered Profit-Taking

Second core principle: Staggered profit-taking. Many focus on stop-loss but don't know how to take profits, letting gains slip away.

Using the same example, suppose you built a position at $8.5 avg, and it trends up:

—At ~$13, sell 1/3 to recoup ~half your principal and lock in profits.

—If it surges to ~$15, sell another 1/3. The remaining 1/3 runs on house money for compounding.

IV. Risk Diversification

Some think they're diversified by holding 10+ stocks across sectors like chips, healthcare, and 新能源. But during a systemic correction, you'll realize—if all 10+ fall together, it feels no different from holding one heavy position.

True diversification requires low correlation. Pair tech stocks with gold or consumer staples—they won't move in lockstep. No position should exceed 30% of capital, so one mistake won't cripple your account.

Lastly, diversification usually means cash allocation. I've written about this before—check it out if interested.

V. Bad Habits to Break

1. Ignoring stop-loss, doubling down on losses

The classic mindset: "It's dropped so much, one more average-down will fix it." But you never know if it'll rebound or delist. Set a budget for averaging down and stick to it. Discipline separates investing from gambling.

2. YOLO-ing on rumors

For unverified rumors—especially in small-caps—use tiny positions to test. Only add if volume, price action, and fundamentals align. Unverified news only deserves a test position, not your whole account.

3. Hoping time will heal losses

Simple math: A 50% loss requires a 100% gain to break even. Don't hold "good stocks" through endless dips. If no rebound seems likely, exit or lower your cost basis. Dead money could be deployed elsewhere—even gold beats watching losses. Good companies will always offer entry points.

VI. Position Strategies for Different Markets

Position management isn't rigid—adapt to market conditions.

In uptrends, pyramid in: Add 30%+20%+10% as price rises. Stop adding above target, start taking profits. You won't catch the bottom but will ride most of the wave.

In bear markets, averaging down is high-risk—only for deeply researched quality assets. Use a reverse pyramid (10%+15%+20%) to lower costs. A V-shaped rebound brings huge gains, but preset max loss limits and cut if fundamentals break.

That covers position management and diversification—my experience plus proven strategies. Hope it helps.

Follow Vivian for ongoing HK/U.S. market insights.