Pyramiding Trade Size - Risking Profit for absolute return?

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young gun

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Hi all

I am a fairly novice trader and have been dabling into forex trading using demos and I am getting in preperation to go live soon with a small account balance of $300 USD. I know this is pretty small however I think its possible to trade using a broker like oanda that doesnt have a minimum trade size or brokerage (other than the spread).

From doing a bit of research I have come to the conclusion like most more expirienced traders, winning in the game of trading has alot to do with Risk Management (money management). I am looking at a number of stratergies including pyramid sizing my positions and wanted to know if anyone had any expirience / comments about pyramiding a position and risking the profit at a retracement.

This would involve entering a 2nd position once the first profitabtable position has gone into a retracement and risking the profit gain on the first position to increase the contract size.

I have devised a calculator that uses the new stop loss and risks the profit from the 1st trade to increase the size of the new position. By doing this I have realised I am able to increase the contract size by a large multiple but i am able to ensure that if the trade did break down to my new stop loss below the retracement i entered at, I would only losse a max of 2% of my equity before the trade as well as foreifting my profit on the current trade.

This technique looks like it would work well for an absolute return trader.

Opinions , ideas , thoughts , feedback would be super !
 
young gun said:
Hi all

I am a fairly novice trader and have been dabling into forex trading using demos and I am getting in preperation to go live soon with a small account balance of $300 USD. I know this is pretty small however I think its possible to trade using a broker like oanda that doesnt have a minimum trade size or brokerage (other than the spread).

From doing a bit of research I have come to the conclusion like most more expirienced traders, winning in the game of trading has alot to do with Risk Management (money management). I am looking at a number of stratergies including pyramid sizing my positions and wanted to know if anyone had any expirience / comments about pyramiding a position and risking the profit at a retracement.

This would involve entering a 2nd position once the first profitabtable position has gone into a retracement and risking the profit gain on the first position to increase the contract size.

I have devised a calculator that uses the new stop loss and risks the profit from the 1st trade to increase the size of the new position. By doing this I have realised I am able to increase the contract size by a large multiple but i am able to ensure that if the trade did break down to my new stop loss below the retracement i entered at, I would only losse a max of 2% of my equity before the trade as well as foreifting my profit on the current trade.

This technique looks like it would work well for an absolute return trader.

Opinions , ideas , thoughts , feedback would be super !
Click to expand...


Why are you asking, just do it! Open a practice acc. and go crazy, try all the zaney, whacko, nut job ideas at first hand.......and then make your own mind up.
 
yeh I am planning to do it, i just thought I would get some feedback !!
I know nothing is as good as testing it yourself, different strokes for different folks. One traders holy grail is another traders peril!!
 
young gun said:
yeh I am planning to do it, i just thought I would get some feedback !!
I know nothing is as good as testing it yourself, different strokes for different folks. One traders holy grail is another traders peril!!
Click to expand...


Good luck with it all.
 
young gun,

I think what Paul71 is trying to say (apologies if I am wrong) is that newbies will either ignore the good advice and end up trading the way they want to, or, they will be inundated with so many conflicting opinions that they will be more confused than when they began. The only advice I will give you, which only a fool would ignore, is - ALWAYS TRADE WITH A STOP. As a newbie you should keep a fixed stop in the market sent with your opening order or immediately after.

Some wise words from The Grand Master:

The single most important thing you have to concentrate on is limiting losses.
You do this by using stops.

As you become more procicient at picking winning moves you have to tighten your stop loss policy.

Limiting losses to the absolute minimum is the key. All else is peripheral.

Now that is a simple statement.

If everyone did this, everyone would survive long enough to eventually become proficient.

But very few have the self discipline to persist in this way.

I strongly suggest you follow the lead I have just given you.
Click to expand...



Without going into deep details I explained that efficient traders use very tight stops because efficient traders get it right many many more times than they get it wrong, that is why they are efficient traders, OK ?

Therefore efficient traders are surprised and shocked when they get it wrong. The fact that they use very tight stops immediately limits losses.

Inefficient traders are apt to use wide stops and some blighters none at all !
They now begin to argue, yes argue, that to use a wide stop is the right thing to do because it allows a position to "breathe" and other nonsenses. When it is pointed out that wide stops used by inefficient traders who get it wrong often and really ought to fiercely control losses, they get abusive, or, begin to argue.
Click to expand...


I have to approach all of this from a very different angle to what is the norm, either for efficient or inefficient traders.

I justly expect to get it right every time, and I very nearly do. Because of this I am aware that from time to time I may make an error, or, suddenly conditions change just as the buttons have been pressed. Therefore, statistically speaking, the greater the number I get right in a row, the more alert I make myself become to the possibility that the next one, or the next one after that, etc., could be the one to break the run.

This causes me to become more and more guarded and more and more "super alert" to such a possibility. Therefore I always use a ridiculously tight stop. I expect any pozzie to get at the money immediately, and in the money very quickly. If this does not happen quickly and efficiently, then I concede that what I did was right, but conditions suddenly have changed, or that conditions are about to change, or that conditions synchronously changed while the buttons were being pressed, or that I misread the market in gereral terms or the specific conditions existing at the time, or walked into an ambush, because that is also possible.

As a consequence of very long experience spanning several decades in this profession, I have to force myself not to be complacent. I have to be very aware of unexpected risks, just like everybody else.But, therefore, for the opposite reason to many others, I have to be be particularly guarded against lulling myself into a sense of false security, on the basis that a long successful run is going to continue as such. Therefore I have to prepare myself against these dangers, the greatest being dereliction of action (response) as a consequence of viewing an unexpected outcome as a contradiction, as a personal affront, if you like. Then for me rigid adherence to a tight stop policy is crucial in order not only not to damage performance and have to do unnecessary work to recover what is avoidable but also to assist in the emotional disconnection necessary.

You can see that I approach this differently to nearly everybody else, and the reasons for my approach being so.
Click to expand...
 
That's what i meant, NT. Great post by the way, reading the inserts originally posted by SOCRATES, makes you realise that a lot of stuff posted about stops is pure BS, posted by non-traders.
 
YG,

If you "pyramid", the risks are compounded, ie as more positions are added at an increased size, your breakeven diminishes. The logical approach is to reverse pyramind - start large and reduce subsequent size (the breaken point increases).

However, this assumes your initial capital is sufficient to trade a larger size without compromising risk, eg if your margin dicates only 1 or 2 positions, don't start with a greater number.

The safest way is simply to add 1 contract/position at a time and only at a point when a reversal will not wipe out the existing profit.

Grant.

Grant.
 
young gun said:
I have devised a calculator that uses the new stop loss and risks the profit from the 1st trade to increase the size of the new position. By doing this I have realised I am able to increase the contract size by a large multiple but i am able to ensure that if the trade did break down to my new stop loss below the retracement i entered at, I would only losse a max of 2% of my equity before the trade as well as foreifting my profit on the current trade.
Click to expand...

My concern here is that otherwise good trades could still end up a loser. By scaling up like that and not locking in profitable results with where you trail your stop you will almost assuredly lower your win rate. That could end up lowering your overall performance. Certainly you will have a great deal of volatility in your account equity to sit through, and that may be the biggest thing of all. Do not discount the psychological strains that will create on you - especially if one moment you're up 20% and the next you've lost that 2% you mentioned. It can be crushing.
 
grantx said:
The logical approach is to reverse pyramind - start large and reduce subsequent size (the breaken point increases).

.
Click to expand...

starting large guarantees that you will have the biggest losses whenever a trade doesn't work out.
The approach of adding to positions once Stops can be brought in line to protect the position seems very valid to me.
I often use a Buy or Sell Stop to trigger me into the action on a breakout and will sometimes add to my position if subsequent price action permits - but only once the initial trade has been brought to at least B/E.
 
Every tub stands on its own Bum :)

Rhody Trader said:
My concern here is that otherwise good trades could still end up a loser. By scaling up like that and not locking in profitable results with where you trail your stop you will almost assuredly lower your win rate. That could end up lowering your overall performance. Certainly you will have a great deal of volatility in your account equity to sit through, and that may be the biggest thing of all. Do not discount the psychological strains that will create on you - especially if one moment you're up 20% and the next you've lost that 2% you mentioned. It can be crushing.
Click to expand...

Good post Rhody Trader

Every tub stands on its own Bum :)

The head bit you mention in your post is very valid and it will stop most progressing imho

Consistency in your method / execution / is a MUST and should be your goal.

Each add is a seperate trade, if you add for adds sake its gambling and you have lost control (GREED) which is a shame because you probably got it all right on the 1st trade and its just a matter of waiting for another one thats a match to set up, if thats at a better level than your 1st trade................

You have yourself a valid add but you have to protect your gain because its a crime to let a winner turn into a loser imho

from my own favorite rules I found some place when looking for something else (not the specific set)

15.When adding to a trade, add only 1/4 to 1/2 as much as currently held.
That is, if you are holding 400 shares of a stock, at the next point at
which to add, add no more than 100 or 200 shares. That moves the
average price of your holdings less than half of the distance moved, thus
allowing you to sit through 50% corrections without touching your
average price.


latter
 
RC,

You ignore the qualifier:

"However, this assumes your initial capital is sufficient to trade a larger size without compromising risk, eg if your margin dicates only 1 or 2 positions, don't start with a greater number".

In effect, I'm saying if your margin is adequate for only one position then ideally you should wait until you have adequate margin for a larger number of positions. For example, if you can only trade 1 lot with £2000, wait till you have a greater multiple to trade more, eg 2 lots at £4000, 5 lots at £10,000. In relative terms, the risk of trading 1 lot with £2000 is the same as trading 5 lots with £10,000.

Grant.
 
MP -- welcome to step one !

the concept of what you call "pyramiding" is a very old "investing" concept, grounded in solid logic IF YOU ARE INVESTING and not trading !

but to abolish philosophy, a reasonably safe method (as long as youre aware of the trend) is the one you speak of ---- and buying on the dip (or "averaging down" as its really called) will probably be used forever.

Its just that I WONT DO IT and given some time, neither will YOU !!

take your scenerio just a few months down the road after you gain some experience --- now you jump on the perfect 3rd wave, go long for 97 pips and EXIT AT THE TOP (or even where you think the top is) and wait to see if theres gonna be a reverse.

WHEEEEEE -- the currency reverses smartly, your fibs are drawn and the 50% figb lies all the way down THERE, beckoning as the sweetest mistress in the night !

So now you hit the short, just as the pros did, and ride this down to where she had been beckoning, and NOW you set a buy stop (or just go on experience and BUY) for the trip back up, doubling your bet as you see how well shes performing for you !

YOU HAVE JUST MADE 3 PROFITABLE TRADES INSTEAD OF ONE that went down and up and are smiling broadly at being a "trader" and not an "investor

now understand gaining the experience for these trades takes time and while not the simplest thing in the world, is learnable by pretty much anyone (including the times of the day all this stuff happens)

so right now, as youre being told, have fun with the demos till you find something that works for you, always keeping in mind that you have MANY more years of LEARNING ahead of you ---- the lover youre with today will probably not be the one youre with in a few years, as your needs, wants and desires will be changing constantly !

oh yeah --- i fall into the camp of NO sl's, but until one knows HOW to trade and HOW to read the trend, its not a concept to be learned ---- unfortunately, when you trade the way you plan on doing, a tight sl will probably kill you every time due to the drawdowns (reversals) that you plan to sit thru --- if you calculate incorrectly, the sl will grab your money before you hit the 50% fib (or the 23%, which often happens)

enjoy and trade well and see ya in a year --- youll be a very different person by then !

mp
 
Last edited:
grantx said:
RC,

You ignore the qualifier:

"However, this assumes your initial capital is sufficient to trade a larger size without compromising risk, eg if your margin dicates only 1 or 2 positions, don't start with a greater number".

In effect, I'm saying if your margin is adequate for only one position then ideally you should wait until you have adequate margin for a larger number of positions. For example, if you can only trade 1 lot with £2000, wait till you have a greater multiple to trade more, eg 2 lots at £4000, 5 lots at £10,000. In relative terms, the risk of trading 1 lot with £2000 is the same as trading 5 lots with £10,000.

Grant.
Click to expand...

surely if the original trade is brought to B/E then the additional position is a brand new trade with it's own set of risk:reward parameters ?
All I'm saying is, that just because you're already in a trade, don't think you can"t do more of the same, all things being equal.....
 
RC,

I didn't mention breakevens, I'm talking about adding to a winning position:

"at a point when a reversal will not wipe out the existing profit".

"don't think you can"t do more of the same". In my ideal set-up for reverse pyramiding (trade eg 5 lots) are you saying it would be safer to just keep adding 1 lot?

Grant.
 
Grant,
i think we're in agreement, i think we're talking about the same thing.
i just find it difficult sometimes to understand your Manc accent .......
 
RC,

"In agreement"? Not if I can help it.

I'm currently taking elocution lessons from Phil Mitchell.

I couldn't Rep your "Diplomacy" post nor this one. I think someone is exercising petty jealousies in the T2W hierarcy.

Grant.

REPUTATION for RC's last post (that's shown 'em)
 
well mate, someone must have cottoned on to our Mutual Appreciation Society 'cos I've made several attempts to Rep you but have been blocked too.
I don't mind the rules, but half the time, you're the only one worth Repping around here ......
 
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