pyramiding

cassiopeia

Active member
133 2
There have been very few strategies discussed on this board since it moved from TMF.

For some time I have been toying with the possibility of using pyramiding as a means to increase the return/drawdown ratio of a strategy. My particular definition of pyramiding is that for every increment the security increases in price you buy another unit and if it decreases by a unit you close the whole position, obviously it works in reverse for shorting. Compared with a strategy of using a simple moving stop (buy just 1 unit to open when the instrument increases by an increment from its lowest point, sell the unit when it decreases an increment from its highest point) you get the following comparison table of profits

Profit from Profit from
Moving stop(MS) Pyramiding (P)
-1 -1
0 -1
1 0
2 2
3 5
4 9
5 14
6 20
7 27
8 35
9 44
10 54

The equation is P=(MS)^2/2+((MS)-2)/2

This ignores commissions and spread which should be subtracted from these figures. Obviously the exposure is far greater with pyramiding than a normal moving stop and it may be wise to close the position at the end of day if short term trading. For many strategies this seems to reduce the return/drawdown ratio which to me is the same as the risk element.

I was wondering if anyone had considered used a pyramiding element in their methodology and how this affects the return/drawdown. Another potential advantage is that it seems to automatically increase exposure during trends when most is needed. However, it seems to work well with some securities but not others.
 

oatman

Senior member
2,879 22
Pyramiding would be fine if your stops were guaranteed. As you're built on valuation you're exposed to unexpected moves, and could easily be wiped.
 

bonsai

Veteren member
4,106 10
cass
there is a nice article on pyramiding in
jan/feb traders mag

sums it up pretty well with 5 alternative strategies.

well worth a look
 

warm_machine

Member
70 0
This system delivers good results in the forex market. Timed correctly, it means you have maximum exposure at the market high/low. Can get tricky when working on an intraday level, given it's essentially the opposite of averaging down; you are always only a few points away from a losing position - this position can be remedied to a degree by using a graded timescale but it makes the process less effective on all but the larger moves.
 

bonsai

Veteren member
4,106 10
I only use it on the index
and I have to have a good reason for thinking
the move might be a biggie.

the only way I know of detecting a possible biggie is
using elliott and waiting for the 3rd wave.

I add using the same stake each time (its simpler)
only add when I feel my first trade is secure (after pull back)
 

mintoze

Junior member
14 0
Does anyone know how to obtain the Jan/Feb back copy of Traders mag for the article on pyramiding? I've tried e-mailing a request to the publisher in both Germany and Milton Keynes without the courtesy of response never mind success.
 

TraderPattern

Well-known member
339 7
Effective pyramiding intra-day requires very strong follow-through. Its the kind of strategy that worked during the heady days of the technology bubble but, in a choppy intra-day scenario, I prefer in and out all at once. Attempting to pyramid in such a backdrop would result in way too many flat trades.
 

warm_machine

Member
70 0
TP:- It only needs 40/50bps on a stock or currency pair to make it workable and effective. These kinds of moves are quite modest in current market; that is where the intraday timescale works to your advantage. However, as mentioned earlier, the downside is that you are always a whisker away from the razor's edge. As you quite rightly say, it requires faultless application and so isn't recommended for the novice.
Applied to the longer term, you aren't sailing as close to the wind since the gap between entries might be as large as 100bps, so you'll find that the majority of the very biggest currency trades are made and handled in this way.
 

cassiopeia

Active member
133 2
At first sight pyramiding seems much higher risk since the numbers are bigger, but it's possible to reduce the amount you bet on each increment (in some cases) so your average exposure or expectancy is around the same as with a conventional moving stop strategy. Divide the right hand column by 2 or 3 and you will see what I mean (sorry about the formatting).

If you look at it this way why should pyramiding be any worse than any other momentum strategy in a choppy market since you may not have not committed a large stake before you get whipsawed? However, I agree the maximum exposure will always be greater and this could be very dangerous if there is a step change in the market, or worse still suspension. You would need a larger margin reqirement as well.

Bonsai, sounds interesting, could someone direct me to a source for trader magazine?
 

Skimbleshanks

1
2,325 16
Thanks for the link bonsai - I was having a rummage, and noticed that the link to Trade2Win is listed under Gurus!

There appears not to be any access to past articles. Anyway, mintoze will hopefully be able to read all about pyramiding while munching on his cornflakes tomorrow morning. :D
 

Trader333

Moderator
8,606 932
There is also a pyramiding strategy included in the Turtles Rules which can be downloaded FOC at

www.originalturtles.org


Cheers


Paul
 

ChartMan

Legendary member
5,580 46
I agree with Bonsai, piling in on the 3rd wave, and, as sometimes occurs on the DOW, the 5th, and ,rarely, the 7th, at which time it's time to start looking at unloading. Nth iterations have to be beyond sensible risk. I could see it working on SB's, where there are no comms. or stamp duty.....maybe...
 
 
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