Pyramiding?

Discussion in 'Strategy Development' started by trevorduddle, Nov 29, 2002.

  1. Hi all,

    New to the site; wonder whether anyone had any ideas about this.

    (If this is duplicated, please accept my apologies. I got confused when I last tried.)

    Are there any methods anyone is aware of (or use) that allow you to increase a position size as it proves itself.

    If I am prepared to risk "R" say to a position then if I place it all at the outset and the trade goes against me I am out "R".

    Is there a sensible way that I could build a position such that I do not risk "R" at the outset but later have "R" working for me when the position is working.

    Clearly this means that as not all of "R" is at risk at the outset, the final return will not be as high but I am hoping that by using a better method the average of winner/loser is higher.

    If I could improve this winner/loser ratio then I could increase the stakes to compensate for the fact that all of "R" is not "on" at the outset.

    Or am I trying to juggle jelly? :)

    TYIA

    Trevor:)
     
  2. Hi trevor,

    There are definitely good straegies for adding to positions. I think this is a good question for discussion.

    Could you describe the type of trade you are looking at for this idea? I am sure we can presume you are not scalping, but scalping means different things to different traders.

    :)
     
  3. Thanks inandlong - appreciated.

    You are correct - not scalping.

    I trade individual stocks over periods of days to weeks and have recently looked at methods that will give me more signals to trade. The way I trade, via UK speadbetting firms, incurs no comission or tax charges so is quite efiicient with only normal bid/offer spreads to cover.

    My previous methods, which I shall continue to use as well, use several indicators and are really looking to shoot fish in a barrel. The strike rate is high, the risk/reward ratio moderate but the numer of trades it throws up is very low. These positions are always put on in total at the outset.

    I have been backtesting other methods with much tighter stops that trade much more frequently but have a lower strike rate.

    Although, the methods seem profitable, even if hitting the position with an entire "Risk" at the outset, I was just wondering whether pyramiding into the positions might have some benefit

    Cheers and thanks

    Trevor
     
  4. This is a really important concept, esp. if you're trading over multi-day timeframes.

    If I were looking to do the same thing, I would take a non-optimized backtest of 1 year, and calculate the Maximum Beneficial Excursion (MBE- or some may call it MFE I think) for each trade.

    What you're looking for is something like "If the position goes at least X far in my favor, it will probably go Y further."

    Keeping in mind the trading axiom "Good trades will go your way quickly", you'll probably notice that a lot of your losing trades won't go very far before turning around against you.

    Find the profit level at which fewer than 72.5% (more or less, but at least one standard deviation) of your losing trades continue on before turning around, and set your "Add To Position Stop" there.

    This assumes, of course, that your winning positions go further than this level most of the time.

    Example: 72.5% of your losing trades fail to show a profit of $1/share at any time during said trade.

    On your next trade, the position goes $1.50 in your favor. Thus you add on to the postion.

    I don't have any empirical evidence, but the suggestion I've
    always heard is that $R = 3x + 2x +1x, where 3x is your initial position, 2x is the first addition, and 1x is the second addition.

    I hope this helps.. The opposite of this concept (Maximum Adverse Excursion) can be very helpful in setting stops for your system.

    Regards,

    laz