Pyramid, scaling in, snowball,and adding to positions - Lets talk about it

Trading Discussion
1

However you call it, let’s talk about it. In my search on this site I was unable to find much, if any, information on the subject. I used to be primarily at ForexFactory, but they changed their search tool and I can’t find any information easily now.

I’d like to discuss pyramids. If you’re unfamiliar, it’s essentially when you increase your position size when a trade goes in your direction. There are lots of strategies you can use.

For example:

  1. Do I add a large position initially and smaller positions later one so that reversals don’t wipe out all the initial profit?
  2. Do I add equal position sizes to just try and gain a slight advantage without risking too much on the initial position?
  3. Do I increase my position size as I enter more positions by using the profit from the open trade to increase my return exponentially?

These are just some examples, and I’m sure there are more.

What I’d like to hear is from those of you who have or are using pyramiding in their trading. What are the traits of trading with pyramiding? Is your account balance more volatile?

A big question I have is what type of trading system does pyramiding work well with and what systems should not utilize pyramiding? I’m in the beginning stages of putting together a breakout trend following system and I want to figure out the best way to incorporate pyramiding. I want to get into any details now as I prefer a discussion about pyramiding overall, and not one specific to how I want to trade.

Any insight is welcome.

Thanks,
Matt

2

I’m only a noob trader but my experience with paper-trading pyramid strategies has not been good. The problem was that price seldom goes a long way in your direction without making a considerable retracement stopping out the added-on portion at a loss, even with a manually trailed stop. In that case the pyramiding strategy might very well make less than a strategy of entering with the entire position with a more modest target.

The only time I could imagine a pyramiding strategy adding to your EV is when you’re taking long-term position trades at great s/r where you’re protecting yourself from the possibility of a false breakout. Ie adding to your position when price returns to s/r and bounces. So it might very well work for your strategy. :slight_smile:

3

Well that is the danger of pyramiding. The only way to avoid it is to use liberal stop levels. One method I am considering is to have the stop level trail by a variable amount. It would be 5-10 pips above/below the high/low of the candle two periods ago? For example, if I am in a long trade then the stop level would be 5-10 pips below the low of the candle two periods ago. This doesn’t completely get ride of the problem of a retretracement, but it does seem to allow our pyramid trades to stay in some strong trends.

Would you mind detailing your system that you traded with pyramiding? How were you deciding when to add to your position?

Another thought I’ve been having is how to determine when to add more positions. If we are afraid of retracements then should we not aim to add to our position quicker rather than slower? This is so that it gives those initial positions the best chance to either profit or break even in a retracement.

Last thought for now. Which is better? Starting with a large initial position and adding smaller additions as the trade progresses or adding equal lots along the way? In the former there is a larger initial risk, but it does prevent profits being erased in a retracement. In the latter, there is a smaller initial risk, but retracements are more likely to produce a losing or breakeven trade. I’d like to figure out if there is a way to calculate the expected return from either method. In my head I want to say that adding equal amounts is a viable method as it will produce the largest return on a strong trend, but I can’t prove that yet. This also leaves me wondering at how many levels would you stop adding to your position? If it’s a trend trading system, I want to say we should allow the price to dictate when to stop adding when it hits our SL, but that guarantees that part of our position will not be in profit.

I will say that with either method it’s best to only take the best signals, and meant for longer time frames that produce less but more reliable signals.

4

As for the question of whether to start with a bigger position size and add progressively smaller amounts rather than adding equal amounts, I’d think it would be better to start with a bigger amount and add progressively smaller amounts. This is just food for thought since I don’t trade that kind of strategy.

The reason is, if a second entry was warranted, that would mean that the first entry was actually a great one, in which case you’d want to have started with a greater position anyway. Also if you continue to pyramid, the last add-on is probably going to lose or be break-even, in which case you’d want that last position to be the smallest.

:slight_smile:

5

That is true. I suppose it makes sense because the downside to equal portions is you will always take a hit, unless you’re able to reach the 5th level or above when the most recent additions are less than 66% of your overall position. Risk can still be mitigated from the first level with proper money management and the compounding from pyramid building will still be there even when weighting the initial entries more.

I was merely trying to avoid placing too much risk on the initial large position. Got pay to play though.

6

In a class I took on harmonic trading they taught something similar to this. Lets say for example they thought price would reverse within a 60 pip range they would scale into the trade at three different price levels with equal lots. One near the top middle and bottom. However many of the limit orders got triggered would run to either getting stopped out or reach TP.

This is the same basic idea once your first order is open you’d want the next however many orders to be within the first half to two thirds of your expected price swing.

Hope this helps

7

Makes sense. The thing is that I am trying to build a system with no TP such that I can ride the trend as long as price allows me. Therefore, I don’t know where the first half to 2/3rds would be. I can only assume initially and then through studying my forward testing, analyze the average length of the trends I am catching.

Was there any analysis done in the class to the Risk/Reward, kelly value, or any of that when comparing the trades which pyramided versus the ones that didn’t?

Does anyone have any experience with something called Pascal’s triangle? I’ve read elsewhere that it’s a good tool to use when trying to determine the lot sizes in a pyramid. All You Ever Wanted to Know About Pascal’s Triangle and more

Pick your large initial lot size and then select a path of smaller lot sizes till you reach a lot size of 1. Still, I don’t understand the significance of the lot sizes and how this is supposed to help. Perhaps the ratios make for even pyramid growth so the bulk of the ‘weight’ is in that half to 2/3rds range.

8

If there was another setup as good as the first and the original stop was at breakeven or better, then I’d enter again basically treating it as a separate trade.

9

Scaling in is a fairly efficient way to increase profits. However you still need to have rigid targets and stick to them. You are also never risking more than 2% (or whatever is your initial amount).

Lets say you have a strategy where you trade 2% and set both SL and TP at 20 pips (just for this example, makes it easy to understand). Your strategy gets you in on breakouts or on trends, whatever, and your strike rate is above 50% so the 1:1 risk return is no problem. You have been happy with the 2% for 20 pips, but you regularly see the market move 40, 50, 60 pips, sometimes more. But you “only” get 20 pips (or +2%) from the move. You want a way to safely scale into the move.

Ok, so instead of just setting a TP of 20 pips, every 20 pips you move the SL from the original trade(s) up by 20 pips and open another trade for 2% with the same 20 pip sl/tp.

So:
After 20 pips, 1 trade up 2%
After 40 pips, 1 trade up 4%, 2nd trade up 2%, total 6%
After 60 pips, 1 trade up 6%, 2nd trade up 4%, 3rd trade up 2%, total 12%
After 80 pips, 1 trade up 8%, 2nd trade up 6%, 3rd trade up 4%, 4th trade up 2% total 20%

However, if the markets move against you and hit a SL then it depends where you are as to whether the trade is in profit or loss:

Open 1 trade
If the market moves against you, trade hits SL for -20 pips. Total PnL -2%
OR
After 20 pips, 1st trade is up 2%. Move SL to b/e.

Open 2nd trade.
If the market moves against you - 1st trade hits b/e, 2nd hits SL for -20 pips. Total PnL -2%
OR
After 40 pips, 1st trade up 4%, 2nd trade up 2%. Move 1st SL to lock in +2%, move 2nd SL to b/e,

Open 3rd trade.
If the Market moves against - 1st trade hits sl for +2%, 2nd hits SL for b/e. 3rd hits Sl for -2%. Total PnL= 0%
OR
After 60 pips, 1st trade up 6%. 2nd Trade up 4%, 3rd trade up 2%. Move 1st SL to lock in +4%, 2nd sl to +2%, move 3rd sl to b/e.

Open 4th Trade
If the Market moves against you by 20 pips. 1st trade hits sl for +4%, 2nd hits SL for +2%. 3rd hits sl for b/e, 4th hits sl for -2%. Total PnL= 4%

After 80 pips close all the trades and take the +20% !!!

NOTE +40 pips is the point at which you are guaranteed to break even. You might close the trades at that point for +6% but if you carry on scaling in, you should aways be in the money and at worst you will break even.

So, by scaling in but sticking to targets you can close out 6% after 40 pips or hang on for 12% after 60 pips (or even 20% after 80 pips)! That said, originally, you were taking 2% after just +20 pips, now you have to get to +40 pips just to guarantee you break even. So, the strategy is more risky than before in that there is a greater chance you will hit your initial SL. But the actual amount of money at risk is only ever 2% (or whatever is the stake).

Further, it is very important that you work out precise SL and TP points with which to set your targets. This just used 20 pip examples, but whatever it is, and whatever amount you stake, whether it be 0.5%, 1% or 2%, you need to calculate the entry and sl’s so that you are only every risking that same stake every time.

Equally, don’t think of the SL’s as exit points. They are there just to cover you incase you are wrong. You should plan to exit according to the strategy and take the profit at defined points. In this example the +40 or +60 pips would be good points. 40 pips in this example would strike me as being the safest point to exit and ensure a tidy profit of +6%.

It is also worth saying, if you are going to trade this, you should do it with an EA to move the stops and open/close the orders automatically. You want to make sure they are moved/placed/closed at the exact right times.

Trading it on something that has big swings is where it works well and can make it very powerful. For example gold and brent regularly move 120-150 pips in a few hours. So taking 40-60 pips might be very achievable (with the right strategy for entry). Alternatively, it doesn’t just suit intraday strategies. Trade it on the daily chart but with a 200 pip sl (of course changing the lot size so you are only ever risking 2%), it works just the same.

Scale in, get out…

10

well, pyramid is powerful. tt’s my opinion. I mainly trade that way. but to be honest the ratio of people using this is few among normal traders. out of all i know, only me and another friend of mine doing so.

In my view, a skillful trader at pyramid is the closest to holy grail. why? because he controls his profits and risk. based on certain views. It’s still abit discretion, as it involves monitoring the trade performance vs risk.

can scale in and out.

But no point doing so, why because u need to be comfortable with it, if done wrongly the risk can be higher.

at the end of the day, the intent is to make money. if method 1 makes money for u same as method 2. do something you are familiar with.

11

I, myself looked into this some time ago, ( 2 months maybe) I have found, I was doing it, because I was chasing bad money.

I found its best to start with the smaller lot, THEn, if it goes all out wild on your direction of anticipation, then add a Larger Lot, Then, either ride it out, or TP when your IN Profit, reguardless if you have to close your first trade in a loss.

ANyways, I dont do it anymore…

Strictly ADDING to position now, but I NEVER want more then 1 trade per pair… BUT, IF done correct, its magical,

TING*