Pyramiding

[sammy84]

It would be interesting to hear what other peoples strategies are in regards to pyramiding their positions.

I primarily trade PPS set-ups and will only pyramid when another set up PPS set up develops. I use half of my profits from that position to date, and add it the amount I am willing to risk on the trade. I only use half of my profits because I feel that pyramiding can result in a lot less smooth equity curve. I say this, because with a 40% win rate on PPS setups, pyramiding would mean that I would give back a lot of 2 or 3R profits, in search of the big win. Do others agree with this statement?

I have noticed other forumers mention that they pyramid aggressively. I am curious as to be aggresive if no further entry criteria is presented. Further, do any other forumers pyramid on different criteria to their original entry strategies?

Sammy

 

[kam75]

It would be interesting to hear what other peoples strategies are in regards to pyramiding their positions.

I primarily trade PPS set-ups and will only pyramid when another set up PPS set up develops. I use half of my profits from that position to date, and add it the amount I am willing to risk on the trade. I only use half of my profits because I feel that pyramiding can result in a lot less smooth equity curve. I say this, because with a 40% win rate on PPS setups, pyramiding would mean that I would give back a lot of 2 or 3R profits, in search of the big win. Do others agree with this statement?

I have noticed other forumers mention that they pyramid aggressively. I am curious as to be aggresive if no further entry criteria is presented. Further, do any other forumers pyramid on different criteria to their original entry strategies?

Sammy

Hi Sammy,

Excellent point. Pyramiding, or adding to a winning position, if done correctly, is an effective way to maximize profits in a trade. This is what legendary Nicolas Darvas used so effectively and made a fortune.

I will generally pre-figure the size of the position I want to hold in a stock and then pyramid up to it, usually buying 2-3 or 4 smaller lots.

In the words of another great trader, Ed Seykota: "Pyramiding instructions appear on dollar bills. Add smaller and smaller amounts on the way up. Keep your eye open at the top."

regards

 

[sammy84]

I will generally pre-figure the size of the position I want to hold in a stock and then pyramid up to it, usually buying 2-3 or 4 smaller lots.

Hi Kam

Thanks for the post, this thread was feeling very unpopular
When you say you add to positions, are you look for entries in which to add, or are you adding using pre-determined targets? Can you explain how you add smaller lots? Generally when I pyramid my position size is larger, as I have a portion of my profits to date to increase my overall risk. I have included a chart to demonstrate.

 

[kam75]

Hi Kam

Thanks for the post, this thread was feeling very unpopular
When you say you add to positions, are you look for entries in which to add, or are you adding using pre-determined targets? Can you explain how you add smaller lots? Generally when I pyramid my position size is larger, as I have a portion of my profits to date to increase my overall risk. I have included a chart to demonstrate.

View attachment 30962

I will add to a profitable position if I get a suitable entry to do so. For example, lets say I plan to hold 50,000 shares in some company. I may first buy 25000 on my first signal (usually a breakout) and if the trade follows through according to my plan, I will add a further 15000 and finally a parcel of 10000 shares to complete my position.

 

[db96]

I would consider pyramiding if my initial position is in profit and a trailing stop loss is set at break even or in profit position. The decision to add more depends on your technical +/- fundamental analysis i guess.

 

[Mr J]

Pyramiding is +ev as long as the increased position size is still reasonable in terms of exposure. However, it's just a compromise between a smaller original position and a larger original position. It'll profit more than the small position, but at greater exposure, and it'll profit less than a large original position, but with less exposure. It's practically doubling up while you're ahead. Nothing special.

I prefer to go larger in the first place, as my study on this has shown that my early entries significantly outperform my later entries. This is logical though, as I trade waves, and the earlier we get in the greater the profit range and the less noise we need to experience.

I understand the reasoning behind pyramiding - that we're more confident when our position is winning and it's more likely to be 'good'. I just haven't seen this to be true.

Note that I'm only addressing adding on to a position because it is a 'winner'. I think there is a legitimate case for additional entries as long as each trade has enough independent value to be a trade in its own right.

 

[Mr J]

Continued from the Darvas thread.

Risk to open profit yes.
If your suggesting then that potential profit lost through pyramided trades which dont work out are not out weighed by realsied profits from pyramided trades which do succeed---then I dont have an answer---I simply dont have the reseach.

But there is much to this topic and an extremely important one which is NEVER visited.---well not that I have seen.

Are examples now required?

I'm not suggesting that pyramiding isn't worth it. If done properly (i.e. not just making 'random' entries to double or triple the position just because it is winning) it can be extremely effective. A day with a large upwards movement could bring in multiple times what the original entry would have made, turning a great day into an amazing one.

I just wanted to distinguish between 'poor' pyramiding and 'good' pyramiding, as there doesn't seem to be much talk about it. In this thread for example, Sammy84 asked about the criteria for additional entries, but it doesn't appear that anybody required the additional entries to be proper trades by themselves. This seems to usually be the case from what I have seen.

 

[tech/a]

J

Ive opened another thread not to deminish this one but to raise this and other important and rarely talked about topics and ideas for discussion.

 

[white_goodman]

i only pyramid if its a position I would have taken regardless if I already had a position...

 

[MRC & Co]

A huge amount depends on your conviction and then if price backs you up.

It's probably harder to place such conviction, off pure price action alone. Which I guess is why most 'chartists' use position sizing such as 'fixed fractional', whereby they assign the same probability to every single trade and position size only according to risk.

But if you have conviction a trend will run (for whatever reason you like) then pryamiding aggressively without a different entry signal would be totally viable IMHO.

 

[beamstas]

i only pyramid if its a position I would have taken regardless if I already had a position...

I doing understand this
By doing this you are thinking that your entry criterea is more important than the market actually moving

It the market is steaming along and you already have a position then it should just be like shovelling coal into a speeding steam train, don't stop!

 

[white_goodman]

I doing understand this
By doing this you are thinking that your entry criterea is more important than the market actually moving

It the market is steaming along and you already have a position then it should just be like shovelling coal into a speeding steam train, don't stop!

what if a market isnt trending? whats the difference between earning $1k on stock XYZ and $1k on stock ABC...

 

[beamstas]

what if a market isnt trending? whats the difference between earning $1k on stock XYZ and $1k on stock ABC...

Yep
Good point

 

[howardbandy]

Greetings all --

By pyramiding, I assume we are describing adding to an existing position when that position is showing an open profit.

I have written two articles that will be appearing in Active Trader Magazine's September and October issues. The September issue will out in about two weeks and has an article describing Scale-Out, which is exiting a position in stages. The October issue has an article describing Scale-In, which is entering a position in stages. Pyramiding is a scale-in technique.

I begin each article with the assumption that the size of the position a trader is willing to take is determined before any part of the position is purchased. That position size can be determined by the risk of the trade. If I have $10,000 that I am willing to put into a trade, and my risk assessment tells me that I should risk no more than $1000 -- 10% -- I must limit my position size so that my loss at an adverse exit price is less than $1000. If I am planning to scale-in, my eventual position will be larger than my initial position. All the way along the trade, my risk must be less than 10%.

If my initial position is less than $10,000, and I plan to scale-in, and I am trading an issue that does not have explicit leverage, and the position eventually exits with a profit, there is a period of time during which the price rose and I was holding less than $10,000. When I compare the result of this trade with one where I took the full $10,000 position at the buy signal, the scale-in trade will be less profitable -- it can never catch up while maintaining the risk level.

To summarize: If the issue I am trading has no explicit leverage -- shares have no leverage, options do have leverage -- a trade that is built up by pyramiding either:
1. Cannot catch up in terms of final profit to the trade that was made with full funds at the buy signal.
2. Increases risk at some point in the pyramiding process.

If the issue I am trading does has explicit leverage -- as futures, options, and CFDs -- then techniques that add to winning positions do work, but they are sophisticated and not for the novice trader. Ralph Vince, Ryan Jones, and Van Tharp have written good books about them. My next book, Advanced AmiBroker, will discuss those methods and demonstrate how to implement them in AmiBroker.

Thanks for listening,
Howard

 

[tech/a]

1. Cannot catch up in terms of final profit to the trade that was made with full funds at the buy signal.
2. Increases risk at some point in the pyramiding process.

Howard.

Rather than adding to the position to gain a full sized position you Double Treble or Quadruple the original (full sized) position if and when signal and profit allow.
If you happen to be on a trade which is moving in a parabolic rise (or Fall) you want to BELT it without increasing or at worst nominally increasing risk.


While I agree with both points in the accepted scaling into a position methodolgy,how about when I pyramid I dont take the position unless both the original and the pyramided position have a stop at at least Breakeven.
That way I have confidence that the larger than normal position isnt placing me in a position of greater risk refering to point 2 (Slippage and catasrophic loss accepted).

To me increasing a position size is exactly that---taking on a position size when warrented which is way above the normal position size for the account without placing the account or trade under any more risk.

 

[tech/a]

Or if taking a much longer term view of a position.

 

[peter2]

"Pyramiding is a scale-in technique." I don't agree as I have a different interpretation of these terms. If the maximum total position size is known before the first entry, eg $10,000, then using $5000 initially and then adding another $5000 later is scaling into your total position. It can also be called pyramiding as we are adding to an existing position. If we use the full $10,000 initially then there is no scale in and if I decide to add to this position on a subsequent setup. I call this subsequent addition pyramiding but not scaling in. I do understand how you may call this technique scaling in to a bigger position size.

My position sizing is based on the individual trade risk not the total value of the position although I do limit the size of a share/stock position to 20% of portfolio as part of general risk management. I risk 1% of capital per trade and scaling in using 0.5% then another 0.5% increases brokerage and lessens the total profit in a winning trade. This is only partially offset by losing less in the losing trades. Scaling in reduces the profits in a trading system with positive expectancy.

I do not understand how pyramiding a trading instrument with built-in leverage (options, futures) alters your summarised conclusions. Any subsequent addition of a futures or option contract will not capture as big of a move as the initial trade provided there is no scale-out. The second addition cannot "catch up", ever.

Pyramiding increases the profits significantly (in a pos. exp. system) and the only way to increase profit is to use more risk. Risk and reward are inseparable. Pyramiding a position increases the total risk of the total position by risking an amount for the subsequent trade and risking some or all of the open profit of the initial trade. Total risk must increase as we add to any position, but productive pyramiding does not risk more of our starting capital. If we add a subsequent futures or option position we risk the subsequent trade risk (option premium) plus the open profit from the initial trade. I don't understand how leverage can alter your conclusions.

 

[howardbandy]

Hi Tech/A --

In the research for the article on scaling-in, I tested moving the stop to breakeven when the scale-in trade is added. This is one case where the "conventional wisdom" is incorrect. Results are seriously poorer using the move-the-stop-to-breakeven technique as compared with holding the trade until the exit signal provided by the system. Your system may more amenable to moving the stop than the one I used for the article -- I recommend doing the research to be certain.

----------------

Hi Peter --

You certainly can add to a winning position. If that position has already doubled, then you can add without increasing the overall risk. My point is that many people pyramid too early and, by doing that, increase the risk of the trade. If the risk of the trade after the pyramid is still within their tolerance, everything is fine. But if the risk is now greater than their tolerance, they will be caught with larger than desired losses on trades that become losers after the position size has been increased.

Yes, risk and reward are inseparable. Risk and bankruptcy are also inseparable. The idea is to establish positions sizes that, when trades turn bad, will not result in bankruptcy.

Whatever level of risk is determined by the trader, it is in the context of a universe of possible outcomes. Whether it is done explicitly or implicitly, using analysis or intuition, the trader picks a risk level. And the trader receives along with the risk level its associated probability of bankruptcy. In the long run, every trading system will go bankrupt. The hope is (and it is only a hope) that the trader accumulates enough money to stop trading before the bankruptcy happens.

Thanks for listening,
Howard