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Implementing A Trading Strategy For Profitable Results – Pyramiding involves adding to profitable positions to take advantage of an instrument that is performing well. It allows you to make big profits as the position grows. Best of all, it doesn’t need to increase risk when done right. In this article we will look at pyramid trading in long positions, but the same concepts can be applied to short selling as well.
Pyramiding is not “averaging down”, which refers to a strategy where a losing position is added at a price that is lower than the price originally paid, effectively reducing the average entry price of the position. Pyramiding adds to a position that allows you to fully leverage high-performing assets and thereby maximize returns. Moving down the average is a much more dangerous strategy because the asset has already shown weakness, not strength.
Implementing A Trading Strategy For Profitable Results
From a trader’s point of view, the pyramid actually reduces risk. This is because pyramiding rules force traders to start with one small position and let them identify a dedicated stop price. If and only if this position performs well, a larger size is added to it. If the trade performs poorly after adding additional size, initial gains can reduce the net effect of any losses. On the other hand, if the business is performing well, then the additional size increases profitability dramatically. The technique thus keeps the initial risk low while creating dramatic profit opportunities.
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Pyramiding works because the trader will only ever add positions that are profitable and show signs of continued strength. These signals could continue when the stock breaks to new highs or the price fails to return to previous lows. Basically, we use trends by adding to the size of our position with each wave of this trend.
Pyramiding is also advantageous in that the risk (in terms of maximum loss) does not need to be increased by adding to a profitable existing position. The original and previous additions will all show a profit before the new addition is made, meaning that any losses on newer positions are offset by earlier entries.
Also, when the trader starts implementing the pyramid, the problem of taking profits too early is greatly reduced. Instead of exiting at every sign of a potential reversal, the trader is forced to be more analytical and watch to see if the reversal is just a pause in momentum or a true trend shift. This also informs the trader that he may not be taking just one trade at a given opportunity, but may actually be taking several trades on the move.
For example, instead of making one trade for 1,000 shares in one entry, a trader can “feel the market” by making an initial trade of 500 shares and then other trades as he takes a profit. By pyramiding, a trader can actually end up with a larger position than the 1,000 shares they could trade at once, as three or four entries could lead to a position of 1,500 shares or more. This is done without increasing the original risk because the first position is smaller and additions are made only if each previous addition shows a profit. Let’s look at an example of how this works and why it works better than just taking one position and riding it.
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For simplicity, let’s assume we are trading stocks for our first example and have a trading account limit of $30,000. At most, we want to risk 1-2% of our account on one trade. Using a maximum stop of 1% in dollar terms, we are only willing to risk $300. The trade is stopped so that no more is lost. We look at the chart of the stock we are trading and pick where the previous support level is. Our stop will be just below this. If the current price is 50 cents from the last support level and we add a small margin (ie 55 cents), we can take 545 shares ($300/$0.55=545). Round that number down and take just 500 shares; our risk is now below $300.
We could buy our 500 shares and hold on to them, selling them whenever we see fit, or we could buy a smaller position, maybe 300 shares, and add to it when it shows a profit. If the stock continues to trend, we’ll end up with a bigger position (and thus more profit) than 500 shares, and if the stock goes down, we’ll only lose money on 300 shares – a loss of only $165 ($0.55*300) as opposed to to $275 (0.55 x $500) if we were to take only the static 500-year action.
Now let’s look at an example using a 15-minute chart of the British Pound against the Japanese Yen (GBP/JPY). The circles are the items and the lines are the prices at which our stop levels will move higher after each subsequent wave.
In this case, we will use a simple strategy of entering new highs. Our stops will move to the last swing low after the new entry. If the stop price is reached, all positions will be exited. Our entries are 155.50, 156.90, 158.10 and 159.20 as we add to our position with each subsequent move to new highs after the reversal. The latest reversal low gives us an initial stop of 154.15 and then 155.50, 157.00, 157.50 in sequence. We finally have a turnaround and the market is failing to reach its old highs. As this low gives way to a lower price, we place a stop order at 160.20, exiting our entire position at this price.
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Suppose we can buy five lots of the currency pair at the first price and hold it until the exit, or initially buy three lots and add two lots at each level shown on the chart. The buy-and-hold strategy results in a profit of 5 x 470 pips or a total of 2,350 pips. The result of the pyramid strategy is a profit of (3 x 470) + (2 x 330) + (2 x 210) + (2 x 100) = 2,690 pips. This is almost a 15% increase in profits, without increasing the original risk. This can be further increased by taking a larger original position or increasing the size of additional positions.
Problems can arise from pyramid schemes in the markets, which tend to “disser” in price from one day to the next. Gaps can cause them to break very easily, putting the trader at greater risk by constantly adding to positions at higher and higher prices. A big difference can mean a very big loss.
Another problem is if there are very large price movements between items; this can cause the position to become “top”, meaning that potential losses on the latest gains could wipe out any gains (and potentially more) made by previous entries.
It is important to note that the pyramid strategy works well in trending markets and will lead to higher profits without increasing the original risk. To avoid increased risk, stops must be moved continuously to the last support level. Avoid markets that are prone to large price swings and always make sure that additional positions and relevant stops ensure that you still make a profit if the market reverses. This means being aware of how far apart your items are and being able to control the associated risk of paying a much higher price for a new position.
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The offers that appear in this table are from the partnerships from which they receive compensation. This compensation may affect how and where listings are displayed. does not include all offers available on the market. Traders often jump into options trading with little understanding of the options strategies available to them. There are many option strategies that limit risk while maximizing return. With a little effort, traders can learn how to take advantage of the flexibility and power that stock options can provide. Here are 10 options strategies every investor should know.
For calls, one strategy is to simply buy an anaked calloption. You can also structure a basic callerbuy-write. This is a very popular strategy because it generates income and reduces some of the risk that you will only be on the stock for a long time. The trade-off is that you must be willing to sell your shares at a set price – the short strike price. To execute the strategy, you buy the underlying stock as you normally would and at the same time write – or sell – a call option on the same stock.
For example, suppose an investor exercises a call option on a stock that represents 100 shares per call option. For every 100 shares the investor buys, he would simultaneously sell one call option against it. This strategy is referred to as a covered call because in the event of a rapid rise in the stock price, the investor’s short call is covered by a long stock position.
Investors may choose to use this strategy when they have a short-term position
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