pyramding, playing with the market's ,money?

[Chartsy]

say you enter a trade and it's up $100, is it wise to 'spend' this on adding to a position?
i don't understand WHY you wouldn't, can someone explain how taking profits, and risking the previous positive pnl you had to multiply your gains can be a disadvantage?

 

[LiamH]

say you enter a trade and it's up $100, is it wise to 'spend' this on adding to a position?
i don't understand WHY you wouldn't, can someone explain how taking profits, and risking the previous positive pnl you had to multiply your gains can be a disadvantage?

In my opinion this is the best way to maximise profits but you run the risk of losing what you've already made on the trade so you may have a few break evens and losers before finally getting the home run. Will the home run be enough to compensate? Only you know whether this would work with the way you trade...

Say market pulls back as soon as you add to the position, gutted right? Now, once this has happened 5 times in a row how would you feel?

 

[Chartsy]

losing what you've already made on the trade? surely by waiting until you are stopped out you are 'wasting' that anyway by watching it reverse into a loss, rather than locking it in and adding to the position , in my case i am talking about using the same stop loss on the original trade and the pyramid

 

[LiamH]

losing what you've already made on the trade? surely by waiting until you are stopped out you are 'wasting' that anyway by watching it reverse into a loss, rather than locking it in and adding to the position , in my case i am talking about using the same stop loss on the original trade and the pyramid

Agreed... Dunno if you've took what I said the right way..

Say you short at 1.300 with a stop at 1.400 and you're in for $1 per point. Market hits 1.200 so you double to $2 per point. Market immediately pulls back 50pts and you've lost what you already made so what do you do? Hold it which triples your original exposure or jump out? Tough call without monster reads on where market is heading...

 

[Chartsy]

yes,that's what i mean...your original stop loss will will give you the same loss

 

[LiamH]

yes,that's what i mean...your original stop loss will will give you the same loss

How would it? I don't understand what you're getting at because if you double your position which is pretty extreme anyway then market only has to pull back 50% of your gains to put you at break even... If it then pulls back to your original stop you're tripling your risk on that trade (in my example)? Or am I way off here... ?

 

[Hotch]

You don't see how you wouldn't want to use your floating profit to add to your position? Fine, never take profits, just always add to your positions, it should become clear.

 

[amit1986]

I read an interview with a successful trader who was also asked a question regarding scaling into a position. The interviewer asked him at what point does he realize that he's got to start cutting his losses and not add anymore to a position, to which the trader said that if he's had to add to his position three times and it still doesn't work, then he starts exiting. This was based on his experience.

 

[Hotch]

That sounds more like averaging a loser amit, Chartsy is asking about averaging a winner.

 

[Chartsy]

You don't see how you wouldn't want to use your floating profit to add to your position? Fine, never take profits, just always add to your positions, it should become clear.

with a pre defined target of course.
at liamh, yes the dollar risk of the trade has increased, but i am talking about the risk of your account at the beginning of the trade, so you buy some stock and you're up $100 at an arbitrary point and your original risk was $100 and the account is $10,000.
at the point you are at 10100, you take profit and your account is at 10,100. you then place a stop loss on the $100 floating pnl with the same target you originally had.
if you get stopped out then that's $200 loss, but still only $100 from what you had in the beginning...or am i mistaken?

 

[amit1986]

That sounds more like averaging a loser amit, Chartsy is asking about averaging a winner.

Yes, I am aware. I was simply trying to provide a potential exit scenario because the discussion was also regarding the profitable trade turning into a loser after averaging in.

 

[LiamH]

with a pre defined target of course.
at liamh, yes the dollar risk of the trade has increased, but i am talking about the risk of your account at the beginning of the trade, so you buy some stock and you're up $100 at an arbitrary point and your original risk was $100 and the account is $10,000.
at the point you are at 10100, you take profit and your account is at 10,100. you then place a stop loss on the $100 floating pnl with the same target you originally had.
if you get stopped out then that's $200 loss, but still only $100 from what you had in the beginning...or am i mistaken?

What you've explained here is just the same as letting the trade run at $1 per point.

 

[Chartsy]

is it? im confused, ill give a better example....
i go long eurusd at 1.5, stop loss 1.4, target 1.8
$1 per pip.
at 1.6 i am up $100, so i then risk the $100 as another long trade with a stop loss at 1.4, scaled so that it is $100 risk and no more.
if the target is hit i make 300 from the original long and then another 100 from the pyramid, so 400 altogether which is more than i would have made had i just let it run at $1?

 

[LiamH]

I see where you're getting mixed up.... Your stop is 100 pts, you're 100 pts up so that's 200 points from your stop. You double up to $2 per pt.. At this point you are $100 in profit but if you went all the way back to your stop at $2 per point you would lose $400 including what you had already made... Does that make sense?

 

[LiamH]

is it? im confused, ill give a better example....
i go long eurusd at 1.5, stop loss 1.4, target 1.8
$1 per pip.
at 1.6 i am up $100, so i then risk the $100 as another long trade with a stop loss at 1.4, scaled so that it is $100 risk and no more.
if the target is hit i make 300 from the original long and then another 100 from the pyramid, so 400 altogether which is more than i would have made had i just let it run at $1?

In this example you would be adding $0.50 per point yes? In that case then you are right, sorry.

 

[Chartsy]

im trying to understand why people don't do this? those with set targets can surely take close the pnl and risk some more?

 

[LiamH]

im trying to understand why people don't do this? those with set targets can surely take close the pnl and risk some more?

I don't do it because, generally my targets aren't much more than 1:1, sometimes they are but once I'm in profit I'd rather not risk losing it on a pullback just as I've added to the position. Scaling in to a trend on pullbacks is a bit of a no brainer but you have to know that the pullback isn't the bend at the end and that's not easy!

 

[barjon]

is it? im confused, ill give a better example....
i go long eurusd at 1.5, stop loss 1.4, target 1.8
$1 per pip.
at 1.6 i am up $100, so i then risk the $100 as another long trade with a stop loss at 1.4, scaled so that it is $100 risk and no more.
if the target is hit i make 300 from the original long and then another 100 from the pyramid, so 400 altogether which is more than i would have made had i just let it run at $1?

...and if it goes back to trigger your stop? You lose $200 if I've understood you right - (you haven't closed the first trade so you lose $100 on that and $100 on the second)? That's 2x your original risk. So you're gonna double your risk just to make an extra $100?

The generally accepted criterion is that no unsuccessful secondary position should offset all the profits from the prior position(s).

 

[isatrader]

say you enter a trade and it's up $100, is it wise to 'spend' this on adding to a position?
i don't understand WHY you wouldn't, can someone explain how taking profits, and risking the previous positive pnl you had to multiply your gains can be a disadvantage?

It’s a disadvantage if it increases your exposure to a single product that is above you accounts maximum risk tolerance for a single position. i.e. if the account is $10,000 and you buy a stock that costs $1000 for the initial trade. Then whether you have a stop loss or not there is the possibility that the stock could gap past the stop loss on bad news for the company and be wiped out. So your risk on the single position is 10% of your account whether you have a stop or not. So if you add to that position another $1000 after the $100 move up then you are now risking over 20% of you account if the stock gaps or a black swan event happens. I think pyramiding is a great idea but it needs to be done in a sensible way that doesn’t leave your account exposed to unnecessary extra risk. I just recently finished reading Reminiscences of a Stock Operator where the character talks about pyramiding to build a position to his standard trade size in five trades and only adding to a winning position. Seems sensible to me.

 

[Hotch]

Barjon has the right of it for your example, you're just increasing your risk, and while it moving to 1.6 probably suggests your analysis was correct, it only means your more likely to hit target then you were to start with, not certain.

If you meant you would add to your position and move your stop to 1.45, then that means yes, your risk is the same, and potential profit is larger, but your chance of being stopped out is higher because you lose now where previously you could of won (price moving to 1.425, then to 1.6).