MM68 - Building the Pyramid

I have had so many good questions about what you would like to see in a Market Minute, and this one pertains to almost every single one of you. So many of you are trying to figure out the same thing: what do I deploy, and when? When do I buy stock, and when do I step up to some leverage, a synthetic long or a modified synthetic long? This is not financial advice. I am not a CPA and I am not a trading advisor.

The answer lives inside the pyramid, so let me build one with you. I am going to use Marvell as my example. Say you have a 100,000 dollar account. Marvell is up at its all time high, and you did the hard part: you waited. You waited patiently for your 50 EMA entry, and then your 100 EMA entry. Let's say you are earmarking 5 to 8 percent of your account to Marvell. That is a big allocation percentage-wise, and I am only using it because so many of you follow James at Invest Answers, who runs somewhere around a 4 to 5 percent Marvell allocation. The exact number is yours. This is just how I want you to see the structure.

Here is how I view it. On that very first pullback, I buy a little bit of stock. I would put in maybe 1,000 dollars worth up at around 230, so roughly 4 shares. Then we pull back further, down to 170, and now I am definitely doubling up. If I bought one quarter of my planned size up high, I am buying 2/4 (half), down here. At this point you have spent about 3,000 dollars, and you are building with a solid foundation.

Now we arrive at the 200 SMA. This is the moment everyone asks me about. Do you have enough dry powder for a leveraged investment down here? And more importantly, how do you even know whether you can afford the risk of one? That is the real question, and it is where most newer traders get it wrong.