I'm looking to trend trade stocks using weekly charts. Since I'm using weekly charts, stops can be too wide, sometimes more than 10-15%. How much do you think I should risk per trade? When do you think I should keep adding to positions? I want to pyramid but my average cost increases a lot (weekly charts) and even if I trail my stop, assuming a fixed% risk, I'm not able to add much to my position because of the increase in my cost. I'm looking to have a concentrated portfolio of 1-2 stocks, it's a technical+fundamental kind of thing. Can anyone help me out? Since I want to hold only about 2 stocks, I want to gradually increase my position size to 50% of my portfolio for each stock as it keeps moving in my favor. Do I need to risk more than 2%?
Usually a pyramid involves buying more shares below your average price and fewer shares above your average price. Is that what you are doing?
Is that how it is? I was of the view that pyramiding means adding more as the trade works in your favor, so isn't it going to increase your average price?
I usually call that a sky scraper if you are adding the same amount of shares each time. If you were to add more each time it would be an inverse pyramid. But yes, if you are only adding to winners I suppose the most prudent would be to add less shares each time. So you would have to start with the proper amount. Like 500 shares, then 400, then 300 and so on, or you can do it by dollar value. And that would be a proper pyramid which is what you are asking about. Not much help, sorry, but at least I'm trying to get on the right page.
I did a lot of work on this when I first started trading, which was with stocks. First off, this idea only works with stuff that trends. You get chopped to bits otherwise. I used to risk 1% of my account per trade, with my stop loss at less than 10% of trade value, usually about 7%-9%. In other words, if I got stopped out, my loss would be 7%-9% of the total trade value = 1% of my account. I never averaged down, only added if it moved in my favour. From memory, but this was not an absolute, I would add after my stop was at break even, and price had moved at least 2 X 20D ATR in my favour. It works great in trending markets. Because you only add when price is moving in your favour, your losses are at the smallest size and winners at the largest. You will have to scratch quite a bit if you add and it doesn't move too much. Because of this I'm not too sure how well it would work with just 2 stocks. I used to trade between 6-8 positions, which kept me busy, and it involved a lot of detailed analysis of the trades, so it was not a mechanical do it and forget about it sort of thing.
I recall Richard Dennis' comments about "pyramiding". He basically said that he added to apparently winning positions QUICKLY... such that it was almost like putting on his full position "immediately".
A couple pearls I have found over the years studying this same thing: Pyramiding sounds like a basic and intuitive thing "add to winners and cut losers short quick"...right? Not so fast. Adding to winners CAN result in a fabulously profitable trade turning into break even or small profit if done poorly. Read the following carefully as this can get confusing. Let's say you add as someone suggested when you have your initial/first trade stop moved to break even then you add a new/2nd position with your stop on the 2nd position at the 1st trade entry price/new breakeven stop (current 1st trade stop)What if that stop is hit? You now have a break even on the first leg and a loss on the second leg of the trade. You just turned a winner into a loser. Ok well let's say we only add when we have a profit on the 1st trade then you have a small win on the first and a loss on the second. This goes on and on until you have as much of a win on the second trade as the first and the second trade becomes a winner and stop on 2nd leg is moved to break even. If the stop is hit at that point again you have a small win on the first trade and a break even on the 2nd. You have just tied up more money and have little to show for it. Pyramiding only works in trends as someone's has said but works best in strong trends where the trade is held for weeks in my opinion. Not the average temperament or length of time traders on ET usually hold their trades. But in a weekly trending system like yours it may work. Since I follow weekly trends as well I have specific rules for adding to a trade. So how I do it is more like Richard Dennis as described above. I have very specific entry signals that must be met. When these specific signal trigger a trade entry I only risk 0.75% of my account on that 1st trade with a set stop loss (based off ATR). If I get a 2nd entry signal before the trade is profitable I add to it for another 0.25% risk. The stop loss is kept the same on both legs of the trade. This is the ONLY time I believe in averaging down where my 2nd entry signal may be lower price than the 1st entry and I am adding to a loser at that point but higher price than my stop loss. Now my max risk per trade is 1%. If stop loss is hit now I lose 1%. If the trade becomes profitable I move my stop to a trailing stop. My INITIAL stop loss is based on a multiple of ATR (volatility of the stock). As the trade matures and becomes profitable the stops become trailing stops and with EVERY printed candlebar my stops are raised. If I am now profitable and my trailing stop is in place on the first 2 legs of the trade AND I get a 3rd entry signal before the trailing stop is hit I will add another 0.25%. This is the absolute max I am willing to risk per trade. You may say I am risking 1.25% here but actually it's much less. If the trailing stop is hit I lose the 0.25% on the 3rd part of the trade and much less than the 1% risked on the first 2 legs. It's rare for me to get 3 entry signals and I have lost around 0.75% MAX when pyramiding this way. If the 1st and 2nd trades are initially profitable but my trailing stop is below my 1st and 2nd entry prices AND I add a 3rd position a entered I lose the 0.25% on the 3rd position but never had more than 0.5% loss on the 1st and 2nd positions because my trailing stop is higher than my initial stop loss based off ATR. As the trade/trend matures and trailing stop is higher than 1st & 2nd entry prices I now have winners on those and have ensured a win (barring a huge gap down below my entry which is rare). If the 3rd trade is stopped out the most I lose is again 0.25% until the trailing stop is above my 3rd entry and THEN I REALLY become profitable. The goal is to add as much on the initial entry and add small amounts as it gets profitable but ALWAYS limiting risk but at the same time NOT wasting profits. This method is the best way I have come up with. Doing it only when the 1st trade is profitable or break even makes your average entry price higher and higher until your trailing stop loss is hit. That method maximizes losses and minimizes profits. I hope this helps.
Thanks all of you for your great answers, really appreciate it. @eganon69 , I think yours was the answer I was looking for, thank you so much. I'd just like to confirm if this is what you meant: 1. Risk 0.75% on your first entry. 2. 0.25% on your second, if you have a signal. 3. Keep trailing stops as price moves in your favor, this is going to reduce risk on your positions as you're locking in some rise in price from your initial position. Use THIS decrease in risk to add more in case of an entry signal. The amount to be added (in terms of risk per trade) must not be more than the reduction in risk from your earlier positions. 4. Continue till you're completely profitable? Have I got it right? And by the way, how much do you make in terms of % with this method? I mean, let's say you managed to catch a 40% uptrend, how much (in %) are you likely to make with this type of risk management and pyramiding in terms of your equity? I'm asking since I aim to have a concentrated portfolio, and I'm naturally looking to maximize my investment in each stock to maximize profits while minimizing risk. I understand that this method gives me a high risk:reward, but it should also translate in terms of a good portfolio gain, don't you think? Yes, this is how I thought of it at first. And you're spot on, it just minimized my profits. For eg: I backtested this on a stock which ran up 37% based on my entries and exits, but if I had employed this pyramiding strategy it would've netted me only some 5%. I tend to give a lot of importance on how much a trade is netting me in terms of overall portfolio, since I want to compound at 20% a year. Not an easy target, but not too far fetched as well.
To be clear, I think I emphasised it takes work, there is no one size fits all. We can all speculate on how it would work, all the ifs, buts and maybes. I spent about a 1000 hours working on it. I made an actual 26% with a 34% win rate in a year. The win rate could have been a lot better, but as a foreigner trading Thai stocks, I had severe limitations on my ability to short. Imagine starting every day looking for stocks that will go up in price. It's why I gave up trading stocks. What I did was discretionary. I don't know how to back test that, so I've always forward tested with real money and small size, beer money I call it. You don't add mechanically, you consider adding when the criteria are met. As mentioned, you have to be willing to scratch a lot. If price moves against you after you add, you scratch the add and maybe take profits on the first. The best trades I've had across all the instruments I've ever traded didn't hang about too much and didn't move against me by much. I use time stops also, if it doesn't move fast, I close out. If it moves later, it just means I had a lousy entry. My point about having to do a lot of trade analysis is because of this. And yes, you must be prepared to hold for days to weeks. As long as the trend is intact, you try and ride it. A lot of the work I did was on how to trail stops. I believed in taking profits on what appeared to be deep pullbacks, with a willingness to re-enter if the trend resumed. I have never believed in the Turtle Trading method involving deep drawdowns. I'd rather have my profit booked. But I have always believed there is no one size fits all. You have to work on it and find what YOU are comfortable with. From the knocks I've taken, I can firmly say it's hard to trade confidently with something you are not comfortable with. Good luck with finding that comfort, confidence, and success.