The proper way to pyramid into a position...

M

mgregor

I've read in a few places, including "Reminiscences of a Stock Operator", about the power of pyramiding into your positions.

I would like some input on what the proper way to do this. From what I understand, the idea is to limit your initial risk, while at the same time maximising your potential gains, should you turn out correct.

However, when does one determine he is correct about his position? By the way, I am referring to swing trading, not day trading.

From what I've read, it's a good idea to purchase the bulk of your position initially and only add on the smaller amounts as your trade turns into the green.

Are any of you regularly pyramiding into your positions?

Let's say I wanted to establish a long position of 600 shares in XYZ stock. I would be willing to initially risk $1 with the goal of gaining $8. What would be the proper way to pyramid this position?
 
I usually enter repeat orders when it is an explosive move

you can tell when you see long range price bars along with above normal volume hitting the tape

the proper way to build a pyramid is to have a solid base and then to build smaller and smaller as you go up....the same holds for trading.

For example, start with 1000 shares, add 500 shares, add 250 shares

Good example on Friday would be pmcs lifting from its pivot of $31.00
 
Depends on your disposable funds and time frame. I like NL
funds (Strong) and others, initial is $2500 and minimum add
is $250. NL all the way. Others what the pros use with real
money is Rydex funds (even have short index funds for SP
and NAZ) 25k initial and suspect $2500 add on. You see I
checked out what 'others' you can call it *smart money* are
doing and it's not Daytrading for sure. Check out the site
http://www.fundvision.com - full of folks who either trade NL funds and ETF. :cool: The other asset class is Junk - it suffered a bit now from the telecom problems but let me assure you it's documented as best asset class to trade vis a vis risk reward historically. You can piramid into junk fund when rates are coming down or stay flad down, Junk index is %12/year on your money with limited risk depending on the type of junk you do, the bear market in junk is 5-7 % down for a year. Nasdaq bear is %60 off !!! What a difference ! (QQQ, SPY etc)
 
I often pyramid, but on a smaller time frame. Say im looking for 1.5 pts on 7k shares. I'll try and catch the bottom. As it drops, i'll buy 500 @.4, 800 @.35, 1500 @.3, etc. and keep doing that until It stops dropping. Sometimes I end up with 15-20k shares. It all depends. As long as I feel very strongly about the position, and I know that there is liquidity to get out, I'll keep adding. Then, once it upticks and validates the bottom, I'll add about a third to half more to give it a kick. So if i have a 7k position, I'll buy 2k-3k at market and push up the offer. If the offer doesn't budge, then im wrong, and I bail on those for a dime loss. If right, I have more and have started a buying panic. (I will often then sell those few k for a quick quarter scalp so that I break even on the trade should I get stopped out on the rest.) I often then try and paint it using island. It's amazing how a few well placed 100 share buys can make a chart look amazing and suck in buyers when if i went market, i would just get a fill that does nothing. I don't like pyramiding on a rising position. Chasing is stupid. If you missed the bottom, just accept it. I'll chase maybe 15-20c, no more.
 
Thanks for the replies, but I was more interested in pyramiding into swing trade positions, where I would be trying to caputure $8 or more in profits.

Praetorian2, your example was more of an inverted pyramid, since you start your position with a small number of shares and add on as the price drops, in anticipation of catching the bottom. While I realize this is a successful strategy for you, I was more interested in proper pyramiding techniques for longer term trades.

I think this would be best done by buying about half the desired position initially and adding on more shares as the trade shows a profit. My question is, at what point do you decide the position is profitable enough to add more.

My ideal trade would be an initial stop loss of $1, trying to capture $8 or more in profits. Desired position size would be about 600-1000 shares.

I would think that starting out the position with 300-500 shares would be reasonable, then adding more shares as the trade proves profitable.

If any of you are currently pyramiding your positions in such a manner, please share the details.
 
mgregor

it depends on the type of trade and type of market. A trending market it pays to add to positions. In a non-trending market it hurts to add to positions as the market doesn't have a lot of potential and by adding to a working position it raises your average cost too much if the stock would correct sharply you can easily have a loss.

rtharp
 
mgregor

My pyramids have actually turned out to be my best swing trades. They, of course, don't always work. But when they do, they work well.

Here's my rules:

1. Pyramid only at key technical points. So if you're in a swing trade, and there's a key technical resistance point that is broken, I'll add in. If not, then no.
2. Assume I risk 50 dollars on each trade. Only pyramid in if I can move the stop up on the initial position to break even. Then the next share amount purchase bought can only have a 50 dollar risk, thus almost doubling the potential reward but at worst retaining the same risk I began with. Or you could move the initial stop up so that it's risk is 25 dollars, but then the pyramid entry can only have a maximum risk of 25 as well.

Wet
 
I have done some modeling with historical emini futures data and currencies data. Statistically, pyramids don't improve overall system performance.

You might as well just treat the added shares as a new trade.

Think about this funny situation: Lots of traders often laugh at the 'average joe' investor who has a cost based mentality.. meaning when the market drops, the average joe usually holds on to the losers and sell the stocks he still have a profit in.

But aren't a lot of traders doing the same thing? pyramid into a position should have NOTHING to do with if you have a profit in the trade or not. You might feel you are playing with the market's money (the open profit)... but the fact is, open profit is profit, it is YOUR money now, not the market's.

Although there is no or little statistical advantage, pyramiding does provide psychological advantage to some traders because of the cost-based mentality, as they feel they have a 'free position' to work with.

Hope I made my point clear.
 
dozu888-
I beg to differ. In a trending markets this is not true.
Even in short term trends (like sectors) this is a good play.
Rule - always add in uptrend, or before a move (market builds a base -> you build a position)
Best to add buys in a long uptrend and get out in one or
two moves when it's over ! Even now we have trends now and
then, crude, interest rate, currencies etc.
Garry Smith made $100,000 into $700,000 in funds alone.
he kept buying funds (tech funds etc) into a bubble and
before it popped he got out. This can be done the next
time naz makes a move just don't wait 'till it gets to
6000 (cause it may be a long time...)
 
Originally posted by dozu888
You might as well just treat the added shares as a new trade.
More...
I only add additional positions if additional setups and confirmations present themselves in the course of the original trade. The additional positions stand on their own (i.e. their own stops and objectives.)
 
You must log in or register to reply here.
Back
Top