I have a long term trend following system for equities in which I pyramid. Each purchase is based on fixed percent risk, and I add whenever a position is up by 15% or more. But backtesting shows that pyramiding only adds about 2%p.a. compared to the same system with pyramiding disabled. Each position is treated as a separate trade with its own initial stop, however as the trade progresses, all the positions will have a common exit.
This is more or less what I am doing. I only add to a trade when the current position has enough profit locked in with a stop loss to finance/cover the risk of the new position to be added ... and so on. If a nice long trend comes along, I agree, the position size can grow significantly. To me this is an easy way to manage your trades such that your loses are with minimum size and your biggest winners are with good size.
BTW, thanks to all who replied. I think this is such an important area of trading, that unfortunately is not discussed enough on ET.
There are two things I consider before pyramiding , how to mainatain an acceptable risk profile on the trade without running the risk of being taken out of the trade. Once I add a possition it also means reducing the position risk by adjusting my exit stops but this has a problem of tighteting stops too soon. I believe there is no formula as each market trend is diffrent from the other - eg look at corn rally from october'07 easy to pyramid because rally is a straight lne, then look at lean hogs tanking over the same period - not so easy becuse of deep pull backs - My exprince is pyramiding is easier if you trade the long term using weekly charts
"Averaging up" or pyramiding is something I've done for a long time, with mixed results. I agree with both sides of the discussion here. When price action is directional, aka we're trading trend moves, pyramiding is an excellent way to add leverage without risking too much base capital. Once a trade position enjoys unrealized gains, pyramiding new positions uses that capital as risk if price action stalls or reverses. Works great when directional swings or trends are captured. On the other hand, unrealized gains are the stuff we convert into realized gains. Risk too many of them in sideways price action, and the net result will be no gains at all. * When trading the ER (NQ is equal) on longer-term intraday charts, I used to catch some solid moves for big gains when scaling in. For example, long one unit at 700 and long a second unit at 703 / blended average 701.50 could be exited at 705.50 for +4pts gain per unit. Contrast that to one unit exited at 705.50 and you see the power of addition. More than once I exited doubled-up trades for +8pts ~ +10pts ER in the afternoon plunges or parabolic squeezes. Very sexy $$ when everything clicks. However, there are also times when the same play will stall out at 703+ and come right back to 697. Any attempt at holding a blended stop or staggered stops is wiped out. The original entry at 700 could have trailed out for at least +2pts in contrast. Meanwhile, the pyramided play stops out for par at best or even net-loss overall. Pyramiding into positions is an excellent tactic when the overall goal is to catch directional moves. The tradeoff is accepting reality that many small to medium-size profit moves will result in par to net-loss exits. In essence what we're doing is hunting the bigger moves with bigger size. That's the fun part. The tougher part is trading thru sideways or muted conditions where numerous trades go far enough to offer solid profits on the initial entry, but pyramiding in risks that unrealized gain which then turns to loss. No question, pyramiding always causes a more volatile equity curve. The big gains are profit spikes, while the sideways price action periods will result in no gain to net loss instead of small gain / no loss results on single entry tactics. ** Now that I'm focused on the ES primarily, pyramiding is a detriment. The ES specifically is much more jagged and choppy than ER/NQ symbols. Many times I've tried to work pyramid plays in the ES that chop out for loss in deep pullbacks whereas the ER/NQ would have held stops and continued deep into profits. The ES backs & fills much more than ER/NQ do. Trying to aggressively play straightline moves in the ES has resulted in net-loss sessions for me where simple entry/exit on every trade would have been highly profitable. In other words, the end result had zero to do with trade entry method tactics. Pyramiding is actually a trade-management = money management method, has nothing to do with the entry signal aspect of trading. Trade management methods are of course critical to profit or loss results of any trading approach. As for me, I've realized that straight entry and exit tactics for my style in the ES works best. I'm pretty sure the same would be true in ER/NQ as well. In the past I stopped out of numerous +2pt ~ +4pt moves off initial entry that stalled right at the second position entered and reversed five miles against the first entry. Trying to get cute with blended stops, staggered stops, etc is one more factor to deal with that just ain't worth it for me. ** I'd opine that pyramiding in is an excellent component for true trend / directional traders. If someone decides that their overall objective is to capture the big moves, they already decided to forsake the small and medium moves. That's the reality of trade management: we cannot exit every trade optimally. We either trade for small = medium profit swing and accept occasional big profit moves, or we trade for the big ones and accept many losses, pars and occasional small profit trades in between. Scaling out is likewise not a solution for both. Scaling out partial positions for small gain, medium gain and large gain in pieces only serves to average out at medium gains every time. The exact-same result will be had by going all-out at medium gains in the first place. But... that heated topic has been hammered to death elsewhere in this forum. *** Bottom line? Traders hunting bigger directional moves can benefit from scaling in / pyramiding tactics. Even big players like $RM who must enter less-liquid stocks in pieces due to order size alone have already decided they are not scalping out in the first place. If one's objective is to trade by entering AND/OR exiting in pieces, the decision was previously made to hunt for bigger swings. For me specifically, trading the ES(ER) going all-in and trailing stops all-out for profits of +2pts, +3pts, +4pts and occasionally +5pts ~ +8pts or greater is less work. I have fewer things to think about that where & when to add, how to manage blended stops, etc. The focus can be directed solely toward which of several ideal entry points to work and then focus on management = exit method from there. Like any aspect of leverage, pyramiding is a dual-edge sword. It cuts unrealized profits to loss, or conquers directional moves aptly captured for big rewards. Just part of an overall trading approach focused on directional - trend moves targeted.
I think its best to scalp with the trend rather then build a position, generally adds past the 3th will come back and stop you causing frustration and wasted effort. With the ES on a trend day get your 2--4 points, get out and get back in on a pull back then scalp again etc. John
<i>"I think its best to scalp with the trend rather then build a position, generally adds past the 3th will come back and stop you causing frustration and wasted effort. With the ES on a trend day get your 2--4 points, get out and get back in on a pull back then scalp again etc."</i> At this stage in my career, I agree. In the past I have always relied on two chart for trading: A filter chart for the directional picture, and a faster setting for precision trade entries. Filter charts work well for determining overall trend, but past few months those intraday counter-trend swings have been enormous. Many of them are wider than what used to be an entire day's range. If the trend is down thru a 30-pt ES range from bell to bell, does that render the 14pt ~ 18pt bounces untradable? I chose to setup one small chart with minimal tools (and rules) needed to trade any prevailing direction at any moment in time. That said, some of the signals are on tight swings until next directional push, trend or counter-trend runs away. Taking one entry and managing stops accordingly sheds the losers small and lets the winners run tall. Not the only way to trade by any means, but it suits me perfectly in the ES(ER) at this point in time. I've developed chronic lower back = hip problems from sitting down for 10,000s of hours in front of these screens since Dec 1999. It's time for me to trade less and live more. Work two - three hours in the morning sweet stretch, then go play. Instead of wondering if a double-bottom is building midday, I'm going to work on avoiding double-bogeys on the ninth hole. For those who love to play the trading game, sitting here all day is important for catching the big swing moves as they unfold. I'm well past the enamored with price action = gambler's addiction stage most all traders experience. Less time trading = more time enjoying life itself choice means settling for smaller trades most of the time. No more pyramiding for me... unless that includes shaving points off my scorecard at Reservoir Creek this summer. need to find a place in my bag for the invaluable "foot wedge" club
I've always found that pyramiding overnight produces way better results. I havent back tested it, so I dont really know, its just an opinion based on sight say. What do you guys think? is it better overnight or intraday? Intraday is so much more choppy, that its hard to identify the length of the trend and all the fakes along with it. At least it is for me. 8s
Here are some points that seem not to have been covered (at least explicitly): 1. One does not pyramid to make more (less) or lose less (more) but rather to make a compromise between the two extremes, which is in essence to produce a smoother equity curve. Pyramiding has the great impact on the mean/standard deviation of returns. This is the point that most posts seem to have missed. It is the most important way, in my view, that one should measure the effect of pyramids! 2. If one decides to pyramid, there is an implicit assumption in this: there is a trend and the trend is choppy. So one goes with the trend, but should not commit all the roll as one cannot distinguish between the beginning of a chop and the end of the trend. That is why one should add to the position only if and when the choppy part is found to be not the end of the trend. 3. Given the above I pyramid not in price (but believe it or not): I pyramid in time! I divided my roll in N parts (they can be equal in size or decreasing in size as a function of time). My understanding of 8s-accountant comment is close to mine on this. My equity curve will have a nice (mathematically proven) relationship between simple and exponential moving averages. I cannot say more (sorry trade secrets), on this but the author welcomes comments and PMs from experts or potential users of such tools to discuss them further. Best regards