Pyramiding into a trend

Mike805 · Dec 16, 2004

This is what I wrote a few weeks ago in another thread:

This struggle mainly comes when I am in a winner and I've just scaled in. This is just an example of a trade I will do (focus on the strategy - the price swings are typical of what I've seen in the types of setups I choose):

1. Stock WXYZ, I'll hit the ask at limit 25.00 on maybe a 10 lot.

2. Enter market stop at 24.70 right away. Price immidiately goes in my direction .10, hangs +/-.05 for 2-3 mins. Price continues to move +.30 from my entry.

3. I'll wait for the retrace try to buy a 20 lot at limit 25.15 and get it, or I'll buy the next base if no retrace.

4. Now comes the challenge - where do I put my stop? I'm in a 30 lot and breakeven would be a stop at 25.10. I will say that 60-70% of the time that stop will hit and hence I will not use it. So, I'll put my stop at 25.00 (note this is essentially turning a winner into a loser if the price moves against me) and this has a 50/50 chance of being hit.

5. If the price continues up to say 25.50 I'll put my stop at the original expectancy - 25.30 and I will try to buy a 40 lot if the price goes to 25.60 and try to buy the retrace 25.50.

6. Full exit stop at 25.30

6. Full exit profit target at 25.75.

The point of that idealistic trade (doesn't work like that very often) is that the stop will give you a loss if you are right, in fact if I use a traling stop I will be breakeven on a winner at best.

I've basically just given away my strategy but note it doesn't work very often and be prepared to feel like you just want to enter a profitable stop/trailing and walk away for the rest of the day until close - which is why I'll often just put in a profitable stop and wish it would hit so I can just walk away and stop destroying my fingernails

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Consolidation and retracements are not always so easy to see with a low liquidity product (but there is greater momentum potential IMO). I am a momentum trader but more often than not it will turn into a full reversal when you think you are witnessing a retrace, and what was a good profit truns into a B/E using the above strategy.
Lately (just this last week), while in a winner I have not been changing my original stop, just adding to the original stop out price with size as I add to the position. I kept my stop fixed (just adding the added size to it) and my success rate went to 50/50 from a 35/65 as of the weeks prior but I was overall net negative on these type of trades. Note I only do these in trending days but I am probably going back to the original "staggered stop" approach because IMO it is safer. Has anyone done a good backtest on this?

Pick a percentage gainer of 10% or more for the first hour of the trading day and look to go in at 10% then again at 11% and 12% doubling your size each time with a full exit after 13% total gain of the product. Use a staggered stop versus a fixed stop. I have never really done any backtesting but I am wondering if anyine has tried this (or similar appraoch) and what their results were.

Regards,

Mike

easyguru · Dec 16, 2004

Quote from peterfigliozzi:

Roger that. Here's what I'm thinking about now:

(0) You can think of adding/subtracting as separate entries.

(1) Why would you want to add?

Tentative answer (TA): if your original entry is a low probability one (e.g. top or bottom picking) AND you can identify a point of
progress (profit) that IF reached, gives another entry.

(1.1)If you can identify such a point, why not just wait until then in the first place? Or why not just enter full size to begin with, and get out if it doesn't reach that point?

TA: If the low probability entry pays well when it works, pays well in the long run, but can subject you to drawdowns you'd rather not experience, adding on later can reduce the volatility of your equity curve, at the sacrifice of some profits.

Not entering at all until the add point should also make money, just less of it.

(2) Why would you want to take off (1/2, 1/3 etc.)?

TA: If you can identify a point where the your move is likely to be over and take some profits there, you seal some decent profits if it does in fact retrace.

(2.1) Why not just exit the whole position if you've found such a place?

TA: If you have no means for re-entry, you allow for the chance of a further move. On the other hand, if you do have a means for re-entry, it's probably better to fully exit.

(3)What if I can't identify such points or don't want to alter the volatility of my equity curve?

TA: Then don't position-size.

You can not look at pyramiding in isolation. The profit expectancy and your holding period and instrument you trade will determine it.
Also not all things you entered using the system would move at same speed, so allocating more to faster moving trend can improve your profit.
If you look at many long term trends, they go much beyond your expectations and there is no way of knowing that in advance but pyramiding can allow you to profit from such rare occurrences and can make your year.
You may want to find out probability of something doubling once it has doubled from say a specific point especially in case of stocks.

ElectricSavant · Dec 16, 2004

good point

Quote from easyguru:

You can not look at pyramiding in isolation. The profit expectancy and your holding period and instrument you trade will determine it.
Also not all things you entered using the system would move at same speed, so allocating more to faster moving trend can improve your profit.
If you look at many long term trends, they go much beyond your expectations and there is no way of knowing that in advance but pyramiding can allow you to profit from such rare occurrences and can make your year.
You may want to find out probability of something doubling once it has doubled from say a specific point especially in case of stocks.

ElectricSavant · Dec 17, 2004

murray turtle...hehe had to read this several times. There is some wisdom here. bear markets could be tighter

I would set with Soloman too. Thanks Job...

Quote from murray t turtle:

=======

ElectricSevant/mrs;
Yes on pyramid in bull maket,
less in a bear market .

However its done , keeping in mind ,
that say on 15 day average derivative position,
early work is best - do not be late. Late is bad.

Also do it differently in different seasons,
like frost/hunting season.

The plan of the diligent tend only to advantage,
Solomon,trader king.

PetaDollar · Dec 17, 2004

Quote from easyguru:

You can not look at pyramiding in isolation. The profit expectancy and your holding period and instrument you trade will determine it.
You may want to find out probability of something doubling once it has doubled from say a specific point especially in case of stocks.

We are not disagreeing. You have just mentioned a specific case of trading the long term trend in stocks. In this case, with an estimate of the probability of doubling after doubling, you could do the math a figure out what adding would do to your results.

My main point is, once you get a handle on these critical points and associated probabilities, the question of position sizing is reduced to a math thing.

bro59 · Dec 17, 2004

Price, Volume, and Time. If they sing the Right song, then sing along.

Yeah I pyramid. But not until the story begins to unfold correctly.

dr_strangecraft · Dec 18, 2004

One of the things I look for is the moment when the price moves away from the trend. In a rising market, this means that the value begins to accelerate. I want to be in with extra weight as it takes off. So, as soon as the first position is profitable, I move my stop into positive territory and take on another position. When both positions are definitely profitable, I'd move stops again and ad another contract.

Getting out goes the same way. I am constantly looking for signs of reversal or even a slowing market. Usually, last in is first out.

Yes it is true that I am averaging my profits down. It is also true that I am 'riding' a significant portion of the surge up with most of my money active in the market. Yet as we approach the top (and eventual trend reversal) I have less and less in the market.

I don't worry about averaging my profits down. As my teacher said:

"You can't go broke making a profit."

ElectricSavant · Dec 18, 2004

Thanks for your thoughts....very understandable. May I ask, do you have some mechanical rules, or is it by feel?

Michael B.

Quote from dr_strangecraft:

One of the things I look for is the moment when the price moves away from the trend. In a rising market, this means that the value begins to accelerate. I want to be in with extra weight as it takes off. So, as soon as the first position is profitable, I move my stop into positive territory and take on another position. When both positions are definitely profitable, I'd move stops again and ad another contract.

Getting out goes the same way. I am constantly looking for signs of reversal or even a slowing market. Usually, last in is first out.

Yes it is true that I am averaging my profits down. It is also true that I am 'riding' a significant portion of the surge up with most of my money active in the market. Yet as we approach the top (and eventual trend reversal) I have less and less in the market.

I don't worry about averaging my profits down. As my teacher said:

"You can't go broke making a profit."

MAD10 · Feb 10, 2005

This is quite a long thread and, although I browsed all the messages, I apologize if I repeat a point.
I donât quite understand the function of pyramiding?!
I either want to have exposure or not. If I want the risk â then why do it with any less capital than I have decided I want to risk?
I tend to give all my signals equal weight. A long signal is a long signal regardless what indicator/setup triggered it. If I have a (net long) signal, then I want to be long the instrument my entire size (determined by the capital utilization numbers from the back-tests (roughly a function of volatility and time in play)). The only reason I do something akin to pyramiding is to avoid point risk. In a longer holding period model, Iâll spread out my entry to avoid point risk.

I can relate to the seductiveness of the idea of ratcheting up exposure âas it goes my wayâ, but I believe that this is not optimal capital utilization. Suppose my simple system goes long when the 10 bar MA crosses above the 30 bar MA. My initial size is 10 contracts. Then if after 5 bars I happen to be ahead by say some portion of ATR, I go long an additional 5 contracts, and so forth. IMO, these are two different Long signals that can be evaluated separately and one of them ought to back test better. That is the one that should command an entry of (approx.) all 15 contracts.
I believe that Eckhardt (of Wizards fame) advocates such an approach (my interpretation).

ElectricSavant · Feb 10, 2005

I think the idea is that on trendy instruments (Forex comes to mind) the initial entry from the signal is taken conservatively, then the trader treats confirming price action with an increased position. Its just another way of looking at it...

Another way of looking at is:

If you have an MFE of 2:1 .......50% of the time...then on the confirmations increase size...Signal strenth is not enough to always go all in...it depends...try it...

Face it...most signals are not 100% and if you can measure it there is validity to a "pyramiding probability model"...PPM (ha! new name, you heard it here live on ET!)

Michael B

P.S. Now as far as averaging down...that is another story...

Quote from MAD10:

This is quite a long thread and, although I browsed all the messages, I apologize if I repeat a point.
I donât quite understand the function of pyramiding?!
I either want to have exposure or not. If I want the risk â then why do it with any less capital than I have decided I want to risk?
I tend to give all my signals equal weight. A long signal is a long signal regardless what indicator/setup triggered it. If I have a (net long) signal, then I want to be long the instrument my entire size (determined by the capital utilization numbers from the back-tests (roughly a function of volatility and time in play)). The only reason I do something akin to pyramiding is to avoid point risk. In a longer holding period model, Iâll spread out my entry to avoid point risk.

I can relate to the seductiveness of the idea of ratcheting up exposure âas it goes my wayâ, but I believe that this is not optimal capital utilization. Suppose my simple system goes long when the 10 bar MA crosses above the 30 bar MA. My initial size is 10 contracts. Then if after 5 bars I happen to be ahead by say some portion of ATR, I go long an additional 5 contracts, and so forth. IMO, these are two different Long signals that can be evaluated separately and one of them ought to back test better. That is the one that should command an entry of (approx.) all 15 contracts.
I believe that Eckhardt (of Wizards fame) advocates such an approach (my interpretation).