Trade Pyramiding - Risking Profit for absolute return

[Young Gun]

Hi all

I am a fairly novice trader and have been dabling into forex trading using demos and I am getting in preperation to go live soon with a small account balance of $300. I know this is pretty small however I think its possible to trade using a broker like oanda that doesnt have a minimum trade size or brokerage (other than the spread).

From doing a bit of research I have come to the conclusion like most more expirienced traders, winning in the game of trading has alot to do with Risk Management (money management). I am looking at a number of stratergies including pyramid sizing my positions and wanted to know if anyone had any expirience / comments about pyramiding a position and risking the profit at a retracement.

This would involve entering a 2nd position once the first profitabtable position has gone into a retracement and risking the profit gain on the first position to increase the contract size.

I have devised a calculator that uses the new stop loss and risks the profit from the 1st trade to increase the size of the new position. By doing this I have realised I am able to increase the contract size by a large multiple but i am able to ensure that if the trade did break down to my new stop loss below the retracement i entered at, I would only losse a max of 2% of my equity before the trade as well as foreifting my profit on the current trade.

This technique looks like it would work well for an absolute return trader.

Opinions, ideas, thoughts, feedback would be super!

 

[RobinHood]

Makes sure to factor the spread into your position size risk as your trading a small account - and you'll be paying double since your pyramiding.

 

[peter2]

YOU MUST USE PYRAMIDING.

The only decisions for you are, when? how aggressive?

When?: the next entry signal or at set price increments based on a fixed amount (30 pips) or multiple of atr (2x, or 3x).

How aggressive?: This table might help.

 

[peter2]

You must get your entries perfect in order to pyramid efficiently. If your entries are late than you may not be able to pyramid at the right time.

Pyramiding will double your profits on average (with the same initial risk) and if you get into a good move your profit will grow exponentially (= real fast).

With your starting balance you have next to nothing to lose. It is a great opportunity to gain valuable experience for a cheap cost.

Don't try and scalp. You want the bigger moves of 100 - 300 pips. You should be able to get +5R to +10R moves regularly.

 

[tech/a]

Agree in principal to Pete.

Once you have a profitable trading method finessing your use of funds amplifies return

 

[peter2]

Would you agree with this next statement, tech/a?

If you only have $300 trading capital, then you are wasting your time using 2% ($6) as your trade risk. Use a minimum of 5% ($15). This will give you 20 trades to show you if you can be profitable. With only 20 opportunities you should be looking for the perfect setups and trade them correctly according to your plan. If you just gamble with the balance then you will not gain any trading experience.

If you lose the $300 then you need to review your trading performance or your trading plan. Change what you are doing and start again with another $300. This is very cheap tuition.

 

[tech/a]

If I only had $300 trading capital Id work double shifts.
Invest in a good pillow and work out how I was going to trade---test it and revisit here when I have 10k or more and had a good idea of what I was doing.

But thats just me.

 

[peter2]

"But thats just me." Gawd, glad we aren't all the same, eh tech/a ?

Young Gun: I will look at your blog to see what you have learned about trading.

 

[peter2]

[Young Gun: I had prepared this earlier for you, but now I am not sure if this will help]

You shouldn't need any convincing that adding to your trades that are going in the right direction is a good thing.

The chart shows a hindsight trade example. The breakout trade B1 (0.9355) with SL (0.9310) has a trade risk (TR) of 45 pips. The exit at 0.9440 provides a handy 85 pips profit (+1.88R). You could have got 100 pips profit but only if you planned to exit at the price target of 0.9455. This is a normal result but could we have done better by adding to the trade?

B2 is a valid breakout setup as there is another HL formed. The TR in the B2 trade is 0.9363 - 0.9325 = 38 pips. This is too close to your B1 entry to consider pyramiding. If you had missed the B1 entry then B2 is a second opportunity.

Adding at B3 (0.9397) after a small correction and moving your TS for both positions to TS3 (0.9365) increases your size and decreases your TR to 32 less 10 profit from B1 = 22. (Note for aggressive traders: As this TR is half of your starting TR you may like to add x2 if you are happy to maintain the starting TR).

B4 (0.9437) is after another small correction and could have been placed slightly lower. The TS for total positions is moved to TS4 (0.9400). Now the TR is 37 less BE for B3 and less 45 pips profit from B1 = +8 pips if exited after B4. This is the feel good stage of a pyramided position as a profit is hopefully locked in.

As price moved higher the TS was raised to TS5 (0.94400) to get the last addition to BE. Price reversed and we exited the trade at TS5.

Exit - B1 = 0.9440 - 0.9355 = +85 pips
Exit - B3 = 0.9440 - 0.9397 = +43 pips
Exit - B4 = 0.9440 - 0.9440 = 0 (BE)

Total profit +128 pips for the same 45 pips maximum risk. Had price continued higher then the profits would have been very good (eg. @0.9455 profits would be +100+58+15 = +173 pips) There can be many what if scenarios, but I use examples like this to develop a consistent pyramiding strategy that suits my risk tolerance and gives me a chance of higher profits when I get into a good trade.

 

[IFocus]

There is a book on this site called "Phantom of the Pits"

Read through the sections, took me a while to apply it to my own trading years ago.

Its about having your largest position size on when making profit and your smallest when taking a lost.

If you can grasp the concept and apply it then its invaluable.

http://www.futuresmag.com/cms/futures/website/phantom/

There used to be better linKs will see if I can find one.....

 

[peter2]

I remember it well. He kept his trading very simple and only had two rules but added a third later.

1. Assume that your entry is wrong until proven correct.
2. Press your winners correctly, without exception. (what this thread is about)

3. Profit taking. Remove 1/2 after high volume move in your desired direction, exit the rest now or within the next two days.
Look for re-entry signal.

[from: Phantom of the Pits]

 

[Young Gun]

Thanks for all your comments, tech / a I do agree $300 is an nothing to being with ! However I believe it is better to trial with real money even if the ammount is very trivial in order to develop yourself effectively. Id rather wipe out $300 then $10,000 but more importantly what you have to understand is that I am not in this to get rich quickly, I have one goal and one goal only and that is to perfect a trading strategy that can deliver consistent returns. This is probably going to take a couple of years atleast however I feel comfortable in starting small and seeing how it goes.

In theory the fact I am starting from a small base is not going to effect my trades at all! I am trading with Oanda and they have $0 brokerage, $0 data feeds, the only cost is the spread which from my research is very competitive and to top it off there is no minimum trade size!!