Some traders like to use what is called a nibble trade to enter a position. It is called a nibble trade because the position is entered in parts, nibbling at the final outcome. The stated purpose is to reduce risk of loss, while still allowing a reasonable amount of gain.
As an example, assume that you are watching a stock in an uptrend, and have identified several horizontal support lines from previous price activity. You want to buy on a retracement, when the price dips down, but you cannot be certain which one of the support lines will hold and cause the trend to continue again.
After increasing steadily, the price dips down as if to retrace before continuing. There are three possible outcomes in this situation. The price might hit the first support line and bounce back upwards. The price could break through the first support line, but respect the second support line and continue the uptrend after reaching that level. Alternatively, the price may continue to go down, passing through both support lines and probably starting a change to a downtrend.
The question is how best to place a trade to minimize your risk but still be open to making a decent gain. If you enter a trade at the first support line, you may be lucky and find the price turns immediately. Should the price continue down, you would stay in the trade and hope that the price will take support from the second support line. However, this would start off your trade with a loss which will impact your profit. If the price continues downwards, then you should have a stop loss order set just below the second support line to take you out of the trade and accept your loss.
The nibble trade seeks to reduce the loss that you will have anytime the first support line does not hold. For the nibble trade you would take a part of your intended trade, say 25%, and open a position when the price reaches the first support line. If the price turns around immediately, then you have at least made some profit.
Suppose the price goes down through the support line, then you would place the remainder of your trade, 75%, in a trade when it reached the second support line. In this way, you would have avoided the losses of all the money being in play between the first and second support lines.
If the price goes up from here, then you have made nearly all the profit you can, simply having a reduced profit on the 25% that you placed early. If the price continues down and you have a losing trade, you have only lost significantly on 25% of the money, as the other 75% at the second support line would not lose much going down to your stoploss level.
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