As a trader, it's a general rule of thumb that we should always be looking to maximise potential returns (per unit of risk) with each transaction. We should always be looking to squeeze as much out of the market as we can.
There are times when this can occur by simply letting the trade run its course. However, sometimes market conditions align perfectly for savvy traders to "press the trade" or Pyramiding into the trade.
Don't press your luck; press the trade instead!
Attempting multiple entries in the direction of a trend is one strategy savvy traders use in an attempt to maximise return (otherwise known as Pyramiding). The problem with this tactic is that while it may increase the potential reward, having a larger position in the market also opens you up to more risk. As a trader, you need to find the perfect balance of pressing the trade while not pressing your luck.
There are a few ways to achieve this:
If the market is moving at a snail's pace, and not much movement has been made from the initial entry, any additional entry should be minor. If, however, a decent distance has been travelled, a trailing stop will secure more profit, and any additional entry can be larger. In essence, any additional position sizes are partly dependent on the distance between the initial entry position to stop loss.
Ensure you have a strong driver that pushes prices along. Simply pressing trades at random is not good risk management.
Reduce risk on entry by only adding additional positions when the stop loss on the first position can be trailed.
Pick your battles carefully when Pyramiding
You may find that as time wears on, you're left with a large portion (>2% of total equity) in a single trade. The tactic of adding exposure will generally make for a "short" pyramid, which typically won't grow over 2.5% of overall equity. This Pyramiding tactic ensures you're exposed to additional upside while minimising downside to a level with which you're comfortable.
Here are a few things to be wary of:
Keep an eye out for drivers that influence market psychology: This is when momentum and volatility will be high, allowing you to pyramid into a move more easily. For the technical traders, you may prefer to avoid day-to-day shifts by taking in a broader market view.
Diversify: as with any investment, don't place all your eggs in one basket. Diversification is key to keeping overall risk low.
Have strict risk limits in place: With 2.5% in one pyramid, another 2.5% in another – next thing you know, your overall portfolio heat is close to 10%. That's a high amount of risk to carry around with you. Consider minimising position sizes of certain trades to reduce overall risk.
Consistency is key with position sizes: If your initial entry is $100k and your second is $300k, you're off to a lousy start in building your pyramid.
Final Thoughts on Pyramiding
Remember always to start small and slowly. There's no need to rush in. Experiment with pyramiding until you're comfortable with your approach. Always remember the two key elements to consider:
Resist the temptation to take profit early when the opportunity arises. Sometimes it's best to sit on an existing trade.
Be wary of adding to your trade at "worse" levels. Trends will always end at a certain point, so you don't want to be pyramiding into an extended, ongoing trend. Look for new trends to pyramid in, which will reduce your overall risk.
To provide the best experiences, we use technologies like cookies to store and/or access device information. Consenting to these technologies will allow us to process data such as browsing behavior or unique IDs on this site. Not consenting or withdrawing consent, may adversely affect certain features and functions.
The technical storage or access is strictly necessary for the legitimate purpose of enabling the use of a specific service explicitly requested by the subscriber or user, or for the sole purpose of carrying out the transmission of a communication over an electronic communications network.
The technical storage or access is necessary for the legitimate purpose of storing preferences that are not requested by the subscriber or user.
The technical storage or access that is used exclusively for statistical purposes.The technical storage or access that is used exclusively for anonymous statistical purposes. Without a subpoena, voluntary compliance on the part of your Internet Service Provider, or additional records from a third party, information stored or retrieved for this purpose alone cannot usually be used to identify you.
The technical storage or access is required to create user profiles to send advertising, or to track the user on a website or across several websites for similar marketing purposes.