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| Pyramid into positions by WebMaster 23. Nov
07:25
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| How
do you decide when to pyramid your position? How much capital
should I pyramid with? |
| Re: Pyramid into positions by Louise Bedford 6. Dec 18:50
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What
is Pyramiding and Averaging Down?
Pyramiding means adding equity to a position that is already
trending in the expected direction.
You should never throw good money after bad by buying more of a
share that is not trending according to your initial
expectations. This is called ‘averaging down’. By deciding
to ignore your stop, and buy more of a downtrending share, your
average purchase price may be lower, but the amount of capital
that you have in the trade would have increased. Following this
strategy, you may be ultimately holding a large parcel of
downtrending shares that are draining your trading equity. Often
people follow this course of action in the doomed attempt to
turn a losing trade into a winning one.
When to Pyramid
If you have moved your stop up to break even, and the share has
continued to trend in the direction you were expecting, you
could add money to your winning position. The way to do this is
to set ‘land-marks’ which will help determine when this
action is appropriate.
If you set your initial stop based on patterns, you could move
your stops, or decide to pyramid based on an appropriate pattern
appearing. If your initial stop was made due to a trigger by a
specific indicator, if you get another signal from this
indicator you could decide to move your stops, or pyramid.
Using ATR to Pyramid
Let’s say that you’re already in a position, and you have
chosen a 3 ATR exit from your entry as an initial stop, and the
share trends in the expected direction. When the share has gone
up 6 ATR from your initial stop, (i.e. 3 ATR from your initial
entry) you could move your stop to breakeven. (ie the stop is
still 3 ATR below the current share price action).
When the share has gone up an additional 3 ATR from where you
had decided to move your stop to the breakeven point, you could
consider adding more money to the position (ie 6 ATR from your
initial point of entry, or 9 ATR from your initial stop).
So, when the share moves up 6 ATR from your entry, consider
pyramiding your position, and move your stop to 3 ATR below the
current share price. When the share moves up 9 ATR from your
initial entry, add another pyramid tranche and remember to move
your stop to 3 ATR below the current price.
Every time you pyramid, you should re-set your stop based on the
most recent ATR calculation, at 3 ATR below your new entry
point. This ensures that the stops act as a mechanical ratchet
to protect not only your profits, but also your new vulnerable
additional capital.
Your stops for every position should move in tandem, so you will
not end up with a series of different stops for each pyramid
point. You will get a chance to practice this skill, as it is
essential to conquer in order to ride a trend effectively. As a
suggestion, use a 15 – 20 day ATR.
If you are more used to using 2 ATR as a stop, the principles
described above stay the same, but use 2 ATR increments instead
of 3 ATR.
Pyramid Position Sizes
The additional input of capital into a trade should occur with
smaller increments of the initial amount. For example, if you
position sized based on 1% risk, your subsequent pyramid amounts
could be based on 0.5% risk and 0.25% risk.
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