Pyramiding: Playing with the market’s money

[vivaskyliska]

Hello,

I have been reading on money management methods especially for forex trading , here I am now at "Pyramiding" chapter.

It looks good in a trending market. Essentially with this method, you will lose same (or more slightly more due to commission charged) amount of money that you used to. But your upside gain will be doubled/tripled.

To be specific, the next trade is opened only when the first trade's stop loss level has been dragged to breakeven level. The amount risked is always a constant.

Correct me pls if I am wrong.

Has anyone here tried out on this method? Any thought about this method? Thanks

 

[Xela]

Any thought about this method?

I think it's a good and helpful and valuable principle.

I call it "adding to winning positions", myself, rather than "pyramiding", but I know that what I'm doing with it boils down to the same thing that some other members here describe as "pyramiding".

I get the chance to do it only occasionally, with my fast-moving style of trading. It sometimes comes up when one of the little intraday trends I've luckily caught with a trade-entry turns into something bigger, and I then seize the opportunity to move the stop-loss up (in a long trade) and add another unit at a time, as the trend progresses. For me, as well as being a rarity (mostly because of my fast time-frames and overall trading objectives) it's a good, albeit rather occasional way to maximize my profit on a small proportion of my successful trades without ever increasing my current risk-exposure to any more than its original level. It's definitely part of my "armoury".

 

[Robert Morse]

I think this is a gamblers mentality and a very bad trading discipline. Your profits are your money, and that should always be treated as such and not house money.

 

[Xela]

I think this is a gamblers mentality and a very bad trading discipline.

Really? I'm very surprised to see that, Bob.

To me, it's "good trading discipline" because (just like all my other trade-management decisions) it's tested and proven to increase my net expectancy.

Why does it come across as "gamblers' mentality" to you

 

[learner2007]

I think this is a gamblers mentality and a very bad trading discipline.

I agree with Xela. As long as you have a potential entry based on an indication of a continuation of the trend, the trade would be based on sound trading principals, and certainly not just blind gambling.

 

[tomorton]

I love pyramiding, but only once the position reaches profit, NOT break-even - that's too soon. I think you meant the same as me but let's just be clear.....

By demonstration -
I have a long trade just opened with a capital risk of £100 back to the stop-loss

when the trade reaches +£100 a second trade is opened, also with a SL £100 below entry: the SL on the first trade is moved to its entry (break-even): capital risk with 2 trades open remains £100

when trade 1 reaches +£200, trade 3 opens, also with a SL £100 lower: move SL on trade 1 to +£100, move SL on trade 2 to its entry: there is now no capital at risk

with a 4th trade opened, you will gain £200 if all SL's are hit in a down move

but with a 5th trade open, and all SL's hit, gain would be +£500: the net effect of 1 additional free position (free in the sense there is no additional capital risk), you improve the worst-case outcome by £300

with a 6th trade opened, the worst-case outcome would be +£900

you can now see that reward is rising parabolically with each additional position, while your capital at risk remains flat - at zero.


The downside -
* every trade loses £100 if you wait for the SL to be hit: this is a real reduction in potential return and can be distressing

* if you carry multiple open trades on the same instrument, the risk from a gap to a price below your SL is multiplied, so selection of markets to pyramid is important.

 

[galvinlee888]

Hello,

I have been reading on money management methods especially for forex trading , here I am now at "Pyramiding" chapter.

It looks good in a trending market. Essentially with this method, you will lose same (or more slightly more due to commission charged) amount of money that you used to. But your upside gain will be doubled/tripled.

To be specific, the next trade is opened only when the first trade's stop loss level has been dragged to breakeven level. The amount risked is always a constant.

Correct me pls if I am wrong.

Has anyone here tried out on this method? Any thought about this method? Thanks

This will work well in trending market.

You will lose big in ranging market.

Unfortunately you will lose in long term as the market will trend half of the time and range bond in another half of the time, and you have to pay commissions and slippage.

 

[Xela]

You will lose big in ranging market.

Unless you go about it very stupidly, perhaps, you don't even get the opportunity to do it at all in a ranging market.

 

[Robert Morse]

Really? I'm very surprised to see that, Bob.

To me, it's "good trading discipline" because (just like all my other trade-management decisions) it's tested and proven to increase my net expectancy.

Why does it come across as "gamblers' mentality" to you

I look at each trade on it’s own merits based on risk/reward and expectancy of profit/loss. To allocate more toward a trade just because you are up for the day or week is not what I would do. To me, it is a trail to zero. Trade 1 unit make money. Trade two units make money. Trade three units, lose money. You did not increase the units traded because of a higher expectancy of profit but just because you were up money. I do not believe the math works well that way.

To me risk management is not just about reducing risk to save money. Risk management is about proper allocation of limited capital towards good ideas and avoiding allocation of capital towards bad ideas.

 

[tomorton]

This will work well in trending market.

You will lose big in ranging market.

Unfortunately you will lose in long term as the market will trend half of the time and range bond in another half of the time, and you have to pay commissions and slippage.

In actual fact, when the market stops trending, your pyramids are closed and your profits are banked. Isn't that the idea with all trades? And then you just find another trend.