To PYRAMID into STRENGTH

[Iron.Maiden]

Here is the fundamental flaw with pyramiding or as sone call it, averaging up.

It requires that you determine if the market is trending and not ranging or reversing, without that knowledge you shoot yourself in the foot.

However, if you had such knowledge, you would simply go all in, and not pyramid, therefore, the whole concept is illogical.

 

[K-Pia]

Here is the fundamental flaw with pyramiding or as sone call it, averaging up.

It requires that you determine if the market is trending and not ranging or reversing, without that knowledge you shoot yourself in the foot.

However, if you had such knowledge, you would simply go all in, and not pyramid, therefore, the whole concept is illogical.

I am sorry, but that's the speculator's job.
If one can't tell if bullish, neutral or bearish.
Then one don't speculate, but arbitrage.
If one can't arbitrage, then one gamble.

The flaw is averaging up.
Which degenerate the exposure.
I mean, you get more vulnerable.
It grows the risk of breaking even, losing.
Because one get worst entry price (Average up).
In addition to increasing his size ...

So the flaw is increasing risk, to increase reward.
Unfortunately if it should be asymmetric, convex ....
However, if one can be accurate about the market state.
Then one can use it as a tool to lose small and win big.

The flaw is to overlook that avering up increase risk and decrease the room for errors.

Bullish, bearish or neutral
Means potential to go up, nowhere, down.
There's no timing, no predefined levels.
If you can't do that ... What do you do ?

And it's also a fallacy to consider each new entry on its own.
Because it's a FIFO process. One can't close a second entry,
Without closing the first one, first.

 

[K-Pia]

Risk = Hazard x Dose (Exposure)

To average up
- Decrease room for errors, therefore increase P(Hazard)
- Increase our exposure (%Capital allocated)
Therefore it increases Risk.

That's it.
However it may be wise to explore, to increase the exposure,
Little by little, as the wind blows in our favor.
It's a trade off. P(Hazard) vs Exposure.
Different Risk management,
For different conditions.
Intentions ...

The assumptions would be :
- -(Low) volatility environment
- Tendency to move in cycles
- Ability to catch the beginning
...

 

[i960]

Look, if you're in a trend, and it's continuing to trend, you *can* add. This doesn't mean you *double* your size nor does it mean you keep your stop 200 ticks away including the stop on the new position you just added. They're both separate trades and a combined position. Past each new level cleared you move your existing stops up or down for the next leg up or down. If you get stopped out you can choose to only stop out the new quantity you just added or you can choose to stop out the whole thing and then go back to wait and see mode. You're still using profits from the trade to pay for additional risk taken on of the incremental add. Yes you could instead be losing more when you do get stopped out but the entire point is you have a trend so there's more than a 50% chance (so far!) that it's going to continue, it's in your favor at that point.

Take gold's recent run up. The thing was obviously trending upwards, are you going to just sit there and watch with a 2-4 lot or are you going to add a lot here and there as it continues to break through each resistance, retest, and resume uptrend?

If you instead say "hey if I know it's going to trend why wouldn't I just put a 20 lot on at the beginning?" - the answer is you *don't* know it's going to trend that long!

Ride the trend until there's too many people riding it, it blows off, then GTFO. These types of trends don't come along often and if you're in a winning position on one you should probably make the most of it.

 

[K-Pia]

They're both separate trades and a combined position. Past each new level cleared you move your existing stops up or down for the next leg up or down. If you get stopped out you can choose to only stop out the new quantity you just added or you can choose to stop out the whole thing and then go back to wait and see mode.

I agree with you. But you can't stop out the new quantity only. It's a FIFO process. You can scale down or close the entire position. But if you scale down then you'll close your first positions. And redefine your average price.

For exemple:
Price goes from 0 to 10
Trades: open 1@0 & 1@10
the average price 2@5

Price goes from 10 to 5
Trade: Close 1@5 (Close firsts, first)
the average price 1@10

You don't close the last first (FIFO)

 

[i960]

It doesn't even really matter what closes first or last. It's irrelevant. All that's relevant is how much have you made on the trade so far and how much have you lost. Also your example, while academic, is a perfect example of how not to add to a position. It's doubling the size, using a stop 50% of the way from your last add, etc.

I think you probably focus on P/L too much just by how much emphasis your putting on P/L from the specific positions inside the trade. Just because you realized the profit doesn't make it any different from unrealized - other than the fact that it's not involved in the trade anymore. However, that realized profit has the same potential to be used for loss and gain just as the unrealized profit does.

 

[K-Pia]

It doesn't even really matter what closes first or last. It's irrelevant. All that's relevant is how much have you made on the trade so far and how much have you lost. Also your example, while academic, is a perfect example of how not to add to a position. It's doubling the size, using a stop 50% of the way from your last add, etc.

I think you probably focus on P/L too much just by how much emphasis your putting on P/L from the specific positions inside the trade. Just because you realized the profit doesn't make it any different from unrealized - other than the fact that it's not involved in the trade anymore. However, that realized profit has the same potential to be used for loss and gain just as the unrealized profit does.

Why is it bad to double and close 50% away ?
Have you some magic numbers ?

I concur, what matters is yet to be done.
Realized, Unrealized PnL is past or present.
When a speculator has to be looking forward.
However past and present can't be overlooked.

The difference, as you said, is exposure to uncertainty.
Since opens are still in play, we ought to dare and manage it.
Open or closed ... We can potentially loose it all.
Since we "have" to put it at work, to grow it.

 

[i960]

You add enough and at the appropriate area such that you're able to maintain the same level of risk you originally took on. Heck you can even move things to break even if you want but the point is your new stop should account for this increased size and you should add size intelligently (both in quantity and area) such that a break of trend doesn't lose significantly anymore then you already would have lost when you started. You can even choose to make it so you still profit but just not as much. Two things are happening here: you're preserving capital and trying to make the most of a strong trend. People simply don't like to average up because they're scared of losing but ironically have no problem averaging down when they're *already* losing.

 

[profitlocker]

You can even choose to make it so you still profit but just not as much. Two things are happening here: you're preserving capital and trying to make the most of a strong trend

The scenarios and possibile outcomes are endless, but we have to cut off degrees of freedom at some point, or end up babysitting a monster.

IMHO, trying to marginally boost the returns of a robust working model, and doubling or tripling your workload just isn't worth it. To each his own though. We all have different comfort zones.

I chose to trade because it offers flexibility. If it starts interfering with my personal freedom, family life, or health, I would just quit and find something else to do. I could care less whether it's lucrative or not, but only that it keeps me balanced. Life is too short

 

[Chris Mac]

If you don't know how to pyramid, better stop trading NOW.
Pyramiding means "go to the jugular" when odds are increasing in your favor.
Same as in poker when you play small before the river, and increase your bet when your probabilities are better.

CM