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Effectiveness and Risks of Pyramidding
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Effectiveness and Risks of Pyramidding

  #1 (permalink)
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Effectiveness and Risks of Pyramidding

Many people view pyramiding (increasing size as you raise unrealized profits) as a way to greatly increase performance. However, this adds significant risk to an already successful trade. I would like to hear some opinions and quantifiable methods of pyramiding.

Intraday:

Generally to pull this off intraday you need to be highly leveraged. Frankly for most traders this is asking for a blowup.

Daily: It is easy to pyramid on larger trending markets. Look for confirmation on higher time frames and add to your position on pullbacks to major MA's. This does risk unrealized gains, and you should move your emergency exit level to a point that would create a draw down consistent with your normal trading plan.

I appreciate anything people with more experience have to add.

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  #3 (permalink)
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After I move my stop far past breakeven and the position is well in the money, I do "risk-free pyramiding" to the point where it would not move my average fill price in front of my stop. This way, I am not risking my capital, just my paper profits. Sometimes I made 5 or 10 times my daily win limit in a single trade this way.

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pengi View Post
After I move my stop far past breakeven and the position is well in the money, I do "risk-free pyramiding" to the point where it would not move my average fill price in front of my stop. This way, I am not risking my capital, just my paper profits. Sometimes I made 5 or 10 times my daily win limit in a single trade this way.

You have a daily win limit? So if you have made a profit equal to that amount, you stop trading?

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  #5 (permalink)
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You have a daily win limit? So if you have made a profit equal to that amount, you stop trading?

Maybe calling it a limit is not correct, let's call it my "goal" for the day. If I meet my goal, then I won't feel compelled to take more trades unless the market is really moving.

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I do add on to my positions when the market goes against my initial position but that is my intention.

When I identified a price region, I would enter an initial position when the price hit the region and I would add on to the position if I can get a better price after that.

I do not add if the market is moving in the direction of the initial position after it is placed.

I'm scalping in this approach

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pengi View Post
After I move my stop far past breakeven and the position is well in the money, I do "risk-free pyramiding" to the point where it would not move my average fill price in front of my stop. This way, I am not risking my capital, just my paper profits. Sometimes I made 5 or 10 times my daily win limit in a single trade this way.

This is a conceptual thing a lot of people miss with risk management. If you have unrealized losses or profits you have losses or profits. It doesn't matter if you call them paper/unrealized it is the exact same thing. It is the same thing as your starting balance at the beginning of the day (or whatever your time frame). Whether or not you are already positive from your year start should not matter. You should not say "I am +X% I can afford to risk a little more."

If you are going to pyramid this is an ok way to do it, but when you are adding to a position you should ask if you would be comfortable opening a position at that level and if yes where would you want to exit (both profit and loss).

@jonc

No offense, but unless you are doing decent size that is probably a losing approach, ESPECIALLY if you are scalping.

If other people think what I'm saying is incorrect please correct me.


Last edited by telco; October 11th, 2011 at 12:47 PM.
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There are some nice examples of pyramiding on this vendor web site:
The MAX Trading System Example MAX Trades

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Ok examples but any trading system vendor is questionable at best IMHO

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  #10 (permalink)
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telco View Post
This is a conceptual thing a lot of people miss with risk management. If you have unrealized losses or profits you have losses or profits. It doesn't matter if you call them paper/unrealized it is the exact same thing. It is the same thing as your starting balance at the beginning of the day (or whatever your time frame). Whether or not you are already positive from your year start should not matter. You should not say "I am +X% I can afford to risk a little more."

It doesn't matter if you consider unrealized gains as realized gains or not. I am simply explaining to OP that my pyramiding strategy allows me to increase my potential profits on a trade by double, quadruple, etc. without any risk of blowing up my account at all.

Consider the following example, with slippage and commissions excluded for simplicity:

You have a $4000 account, and daytrade margin for each futures contract is $500. You could open a 8 contract position, but this would be a HUGE risk, since a 50 tick loss (1 tick = $10) would completely wipe out your account. Therefore, you set a maximum total risk of 50 ticks per trade. This could be 1 contract with a 50 tick stop, 2 contracts with a 25 tick stop, etc.

So, you buy 1 long at 1000, with your stop at 950. Your maximum risk is 50 ticks. You are not going to blow up your account if this one trade goes bad. When the instrument moves to 1100, you move your stop to 1050, and you pyramid by doubling your position size and buying another contract at 1100. This causes the average fill price of your position to become 1050. Because you are only risking unrealized gains, you do not risk blowing up your account.

At 1200, you move your stop to 1125 and buy 2 more contracts. Now you are 4 long with an average fill of 1125. Again, no risk to your $4000 account balance at all, since your stop is at breakeven.

At 1300, you move your stop to 1213 and buy 4 more contracts. Now you are 8 long with an average fill of 1212.5. No risk to your account balance at all, since your stop is at breakeven.

At 1400, you close the position. Your average profit is 187.5 ticks per contract = $1875 times 8 contracts = $15000 profit on a $4000 account, with no risk of blowing up the account, and never risking more than your initial $500 on that first stop, which quickly went to breakeven.

Obviously you should not pyramid on every trade, and you should only pyramid if you have strong confidence that the target will be filled. But I have used it to double and quadruple my gains many many times. Additionally, you can scale out of the position and do other things that make you a lot more flexible.

There are other threads with titles like "more contracts = less risk", etc. that explain why scaling into or out of a position are good ways to actually reduce your risk.

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