The answer is very simple - if you have one signal that provides a significantly higher expectancy than another, then clearly you want to have a bigger position when you have the high-edge signal than when you have the low-edge signal. Agreed? So, if you have a small position on due to the low-edge signal triggering, and are showing a profit, and then whilst this position is still profitable you get the big-edge signal, then you should increase your size up to at least what you would normally use for the big-edge signal. Thus you are increasing your position when the market has moved in your favour - i.e. you have pyramided. There is a second case where pyramiding is justified - that is where you have two different signals of similar expectancy, but your research has shown that when they both occur together, the overall expectancy is significantly higher. In this case, because the odds have significantly improved, you should increase your position. One example - your counter-trend system indicates that the market is oversold and due for a large bounce, however the trend is still down so you only take a small risk; then, your short-term momentum system shows that the market collapse has stopped and the price is bouncing - with momentum now in your favour rather than against you, your odds improve so you increase your position (pyramiding); then, Maria Bartiromo comes on CNBC and starts saying that maybe now is the time for retail investors to go short stocks - you immediately double your position as the expectancy has gone into the stratosphere with this sure-fire contrarian sentiment signal. Now although you are adding to your position at higher prices, you are doing so because the odds are better at those higher prices than they were lower down. The market is *more* of a buy at those higher prices. Now, if you compare this to someone who put on a double size position as the market was in free fall, or someone who entered small and didn't add to their position, I hope you can see why pyramiding would produce superior risk-adjusted results. P.S. you say that you give your signals equal weight. Assuming that you have researched them all and found that they have similar expectancy, then that is fair enough, and you will not pyramid for the first reason I gave. However, have you researched what happens when you get 2, 3 or more of your signals flashing together? You may find that the historical odds of your trades would have been much better - in which case you should research whether a pyramiding strategy would have provided superior results.
If a dollar note is lying on the sidewalk, do you ignore it because you might find a $10 note later on? The existence of superior opportunities does not require one to ignore other less good, but still profitable (and often more frequent) opportunities - unless taking the less profitable opportunities removes one's ability to exploit the profitable ones too. In trading, it is (usually) incredibly easy to switch out of a good opportunity into an even better one - therefore the "opportunity cost" argument is a weak one. If you have two systems, one brilliant and the other merely very good, there is no reason not to employ the very good one on the occasions when this does not take away capital necessary for the operation of the brilliant one.
Very important aspect to pyramiding is your risk per position. Whether it's position sizing or fixed percent loss to account size.
Thanks Cutten, you said it much better. Questiion, if Bill Gates stops to pick up a c-note on the sidewalk, does it cost him money? This question has nothing to do with this thread or its points, it just Electric trying to make friends with Cutten.... Michael B.
Hi all im new to these forums. Although I have been with trade2winn for 3 years. As for pyramiding I would say it looks easy on paper but doing it for real is bloody hard, what I would do is put all of your position on at the start of the trade and scale out, there is more chance of being correct on entry. As time passes you are more at risk. buzz
Hi all im new to these forums. As for pyramiding I would say it looks easy on paper but doing it for real is bloody hard, what I would do is put all of your position on at the start of the trade and scale out, there is more chance of being correct on entry. As time passes you are more at risk. buzz
Hello Buzz, Click the little text in the lower right hand corner "edit/delete" and delete your duplicate post. Thanks Michael B.
I heard that at his peak, Soros refused to change his babies nappies because the opportunity cost was about $10,000
One problem arises : Will the trade pyramided onto the original trade turn into a loser? I have spent some time studying pyramiding and realise that the result of pyramiding isn't as straight forward as adding to the expectancy of a system. It in fact, warps the characteristics (expectancy, drawdown, win:loss etc) of any system it is applied to. Thus, its usefulness is limited to systems where pyramiding would turned it profitable, raise its expectancy or modify its drawdown in your favor.