Pyramiding/Adding to a trade

Discussion in 'Risk Management' started by DrEvil, Jan 19, 2008.

  1. DrEvil


    I have read often that the best system for adding to a winning position is to pyramid from the base up. For example, buy 10 lots, then (if trade is working out) add 7, then 4, then 2 then 1 ...

    This would equate to 24 lots assuming that the trade works out.

    However, I instinclively prefer a fixed approach something along the lines of buy 6 contracts, then 6, then 6, then 6 ....

    This means that on the trades that are destined to be losers, I am trading small. For the bug winners that come along, I will be trading 20 or so depending just how well the trade is progressing.

    To compare the traditional pyramid with a fixed approach:

    Losers on the pyramid are going to be with 10 lots vs only 6 lots on the fixed approach.

    Winners on the pyramid scheme are going to be with smaller size than the fixed system (assuming that the trade progresses sufficiently)

    I would be glad to hear what others have to say on this subject.... so if you have any experience/opinion on this please contribute.

  2. I pyramid all the time but I also realize price does not go from point a to point b to point c in a straight line.

    For this reason I like to add as price retraces and I like to scale out as price gives me the opportunity to take nice profits.

    Basically a complex variation of pyramiding while maintaining the basic principle of buying low and selling high as the trade moves along.

  3. I do the exact opposite of pyramiding. This gives me best entry for the majority of the position. I put on full position on entry. No scaling in. I scale out as position moves in my favor.

    If I am wrong, I get out quick (close stops).

    Over the years, I have experimented with pyramiding and have found I do not come ahead doing it. It works great on the home run trades, but there is a reason most experienced traders don't pyramid. Most long term traders don't double down either. It only takes a few losers in a row when doubling down to do serious damage. Sooner or later it will happen, even though this technique does improve a typical win/loss ratio. Pyramiding is similar in the opposite way. It gives a crappy average price. I would suggest just gradually increasing your size in general as your account grows. Tried and true technique. Keep each trade to a max risk of some chosen % (preferably quite low).

    My 2 cents,

  4. I tested a scaling method by computer simulation and compared it to a single entry single exit method. Both simulations show about the same results. I decided to use a single entry single exit method because it is simpler.

    Scaling might show better performance than single entry single exit method for some securities. I only tested a few securities using daily price data, not intraday price data.
  5. MGJ


    A huge majority of the pyramiding systems I've backtested, produce worse results when pyramiding is enabled and better results when pyramiding is turned off. By "huge majority" I mean, more than 95%.
  6. Pyramiding into strength makes sense, not adding to losers. It's different if you trade multiples and want and avg. price. Where's the PTJ photo, "losers add to losers"
  7. mogul


    I trend trade with pyramiding at fixed price increments along the trend. Each pyramid position has its own stop-loss level so that positions don't accumulate losses in retracement, and if the trend continues I re-enter stopped out positions.

    This has allowed me to realize 50-100% of capital on a single trend while risking an initial 1-2%.
  8. sim03


  9. Aok


    If you intend pyramiding to improve your equity then I would suggest: adding size to your initial position as you win by a fixed percentage. Drop back when you lose. If you have any kind of expectancy in your methodology, this will help you more than you can imagine. Best part is you set the percentage and takes emotion out of the equation.

    Futures pyramiding is something else. Given the relative low margins to control large face value of whatever, you can (if you have elephant gonads) internally finance new contracts when your position has moved far enough to cover margin on subsequent positions.

    So 1 contract begets 1.
    2 begets 4.
    4 begets 8 and so on.

    The trend is your friend until it ends.

    Try this at your own risk.

    You need a structural or cyclical event to truly employ this. Even then very dangerous.
  10. What about averaging down when the entire market is Bearish like it is now on solid companies like RIMM, GOOOG, AAPL, GRMN?

    What about buying more everytime the stock drops 10-15% for example providing you have the staying power??
    #10     Jan 19, 2008