Hi Everyone,
Ed Seykota and others say that each time you pyramid you should add less than you did at the previous level - but I need to understand why.
Can someone explain what the fundamental reason is?
Thank you,
Norm
Hey Norm.
It’s not carved in stone. It’s Bill Williams (I think i.e. don’t quote me on this as it’s been a while and I could be wrong) that suggests just the opposite. Could even be Welles Wilder (will have to look it up). Whoever: the theory HERE is that you want to be sure and right on the trade before adding bigger positions.
But to answer your question it’s just math really. I ASSUME by pyramiding you are meaning to ADD to a WINNING or PROFITABLE position (and not adding to a loser). Think about it: when you first open the trade and it goes in your favor then the bulk of the profit is going to based on that initial position. So the further the position goes into profit and the pyramiding is getting smaller then the less you’re going to be writing off in terms of profit if the position goes against you. If you’re meaning adding to a loser: cannot help you there i.e. recipe for guaranteed disaster (there are exceptions but this is pretty much the end result under normal circumstances anyway).
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Hey Dale,
Thanks for jumping in. I’ve enjoyed your posts in the past, and now I even get to enjoy your new mug shot. Good choice 
Yes, of course, adding only to a strong trend headed in the right direction with trailing stop loss.
Are you saying that because, when you pyramid, the trend is closer to the end, that the potential R:R is smaller, and therefore the risk should be smaller? And/or, if I add less on the pyramid and it bombs out, it would eat less of the profit I initially made?
I think my understanding is getting clearer, but I’m still trying to understand the fundamental issue. Would you say that protecting as much of my original profit as is reasonable is the fundamental issue?
Thanks Dale!
Norm
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Hey Norm.
Thanks for the compliment. (You do realize that mug shot is actually Michael Chiklis i.e. Vic Mackey from The Shield) (been told most of my life we could have been twins so in the absence of a recent picture of myself I used the next best thing!!! LOL!!!).
You have go it. That’s as I understand the logic of some of these traders that incorporate it into their style.
It’s actually an EXTREMELY overlooked point though. And a very good way to make real money on a trade IF it’s a trend and IF it continues (a lot of ifs there unfortunately). Ideally one would enter a trade with your initial position and once that’s in profit then lock in profit with a stop and then (at the right time whatever that may be) add your next position and move your stop. And so on and so forth. The theory or logic being is that you could end up with a HUGE number of positions on a single trade but with almost no risk if you end up getting stopped out. It’s pretty powerful stuff. At least the way it’s explained in books anyway i.e. not something I do (but that’s only because my trading system or methodology isn’t a trend following system).
Correct again but by placing stops at strategic intervals as (roughly) described above.
Hi Dale,
Nice to know I “have got it.” I thought of that advantage even before I posted, but it seemed so simple that I thought I was missing something truly profound, like something approaching the E=MC squared of forex. Well, if that’s all there is to it, at least I know what I’m dealing with. Much easier to decide on risk amount on the pyramid when I’ve “got it.”
You’re most welcome! We all need a few sincere perks from one another in this sorry world we live in! But no. I didn’t realize it was Michael Chiklis, but I see it now. I’ve pulled my head out of the tube a long time ago and have become a cultural illiterate in that realm - thank God! I only stick my head back in once in a while when I need to turn my brain off.
Thank you for your most enlightening post and affirming that my understand is, according to your assessment, the bottom line.
Take care, Michael - I mean, Dale,
Norm
My pleasure.
I’m with you 100% on the above (if only in my case to avoid Bloomberg or CNBC or anything else that may cause me to doubt whatever indications my trading system or methodology may be firing off at the time and which is invariably in conflict with the so-called analyst of the hour but is almost always right in the long run so figure that one out).
Chat soon.
Regards,
Dale.
Hi Norm - Ed Seykota’s wrong.
When winning, successful professionals report that they increase risk. Amateurs of course notoriously increase risk after they have sustained losses.
I think the market doesn’t know what trades you have had or what trades you are in now or whether you used a TP or whether you’re still in the winners. If price is as likely to “rise” now as when you opened Trade 1, risk as much now as then on a new trade - actually a little more allowing for the proportionate growth of the account - but not less. And if the chosen market is even more likely to “rise” than when Trade 1 was initiated, we should definitely be risking more. If its impossible to gauge whether the market is likely to “rise” at all, get out. And of course, if the market is less likely to “rise” now than it was at the opening of Trade 1, get out.
ATB
Tom
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Hi Tommor,
Thanks for your response. I’ll be reading it over and considering it.
At least I’m clearer, it seems, from prior responses, on what the “add less-ers” had in mind. I’ve not come to a clear conviction on my approach yet, but your response is one viewpoint I’ll be considering.
Wow! That either takes b _ _ _ s to make such a definitive statement or you are really convinced.
Have you been pyramiding with your approach? Has your experience confirmed what you have written?
Thanks again,
Norm
Ed Seykota has displayed the same caution most all reputable trainers and authors put over - and I respect them, I’m not talking about the out and out scammers and charlatans and liars.
The most reputable teachers don’t want us to get rich quick. That’s counter-productive for them. It puts them in the same business sector as the get-rich-quick scammers. Its also undermines their next book project - their career as writers is over if we all read their first book and get rich and stop buying trading books.
What they want is for most of us to not get rich but none of us get poor very fast. This keeps us in the game, it distances them from the losses we’ve incurred and it means we’ll very possibly recommend their work and buy their next book or course or what have you.
Yes, I do pyramid all winning trades as long as the trend I’m following remains at least as strong as when I got in.
T
Plus of course successful professionals in the investment game increase their risk as they ride their winners- amateurs notoriously increase their risk as they sustain losses…
Hi Tommor,
At this point, I don’t know what to say about much that you’ve written, but you wrote,
Am I correct in assuming that your pyramiding policy includes adding at least as much or more at each pyramid level than you risked when you open your trades? Has your experience confirmed that this is the best way to do it?
Norm
Usually I add the same sized trade. An exception would be when going long on the Dow when I am more happy to increase trade size though I can’t say I have a particular formula for working this out. Best ever outcome was early 2018 when I doubled Dow longs over the original trade: got up to 6 pyramids on top of the original trade.
However, I am more cautious in forex. The Dow pyramids were opened on a scale basis, just as soon as a profit target was reached. In forex, I would only pyramid on a new bona fide chart entry signal.
Am I correct in understanding that when you do pyramid in forex you “add the same sized trade?”
The reason I’m drilling for a clear understanding is to determine how much authority I can lend to your declaration,
Please forgive my skepticism. I’m simply a “clear answer” kind of guy because I want to learn - especially when we’re talking dollar$.
In any case, since there seems to be controversy over the best policy, what I think I will do is test the less or equal policies. If the equal wins out, I may test adding more than my original risk.
Nevertheless, for reasons I explained, I’d still appreciate a yes or no answer to the question I opened this post with.
Thanks again,
Norm
Hi Tom,
You wrote:
Is this a theory that you have, or can you document or prove it in some way?
Norm
Yes that’s it, the pyramid trades are all the same size as the initial trade but bigger if going long on a strong Dow uptrend.
Thanks, Tom. That makes it clear.
Norm
Its purely a theory. But all the characteristics and outcomes of the process of learning from reputable and honest experts in trading bear it out. I have not heard any trading expert share this theory, but they obviously wouldn’t be doing self-defeating like that.
So, when you learn about trading from a reliable, honest and expert source, there are 4 possible outcomes for the student -
a) get rich quick
b) get rich slow
c) go broke slow
d) go broke quick
a) Doesn’t happen. These are experts after all.
b) Happens for maybe 25% of the "audience"
c) The remaining 75%
d) Very rare, unless the student applies ridiculously poor money/risk management, but then they would effectively be contravening the teachings we have already accepted as effective.
There are also 4 possible outcomes for the author -
a) Word of this system spreads like wildfire. Book sales decline rapidly.
b) Lots of respect and recommendations, good exemplars for new students to aspire to. More book sales to new students.
c) The usual outcome. More book sales from both new students and the losing students.
d) Criticisms, trolling, negative reviews, suggestions of dishonest dealing with students, maybe even possibilities of litigation. Very rare. No more book sales.
From a reputation and business point of view, outcomes under c) are always best for the expert - sell an effective but degraded and hard to follow trading system: keep selling it and keep selling tweaked versions. Income for life. Happy days.
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Goodness me. Where did all THAT come from??? Did you have Jungle Oats this morning for breakfast or what??? LOL!!!
EXCELLENT post Tom. Should be made a sticky!!! TRIPLE like!!! LOL!!!
Hey Norm.
I cannot really comment further one way or the other as it’s something that I’ve never implemented i.e. whatever input I’ve given has been from stuff I’ve read over the years by so-called famous traders that I’ve pretty much based anything and everything I’ve ever done over the years on. Tom’s post sure does explain a lot!!! LOL!!!
The above being said I’ll see if I can dig up some of my books where pyramiding (into profitable trades) is purported to be the way to go. Cannot promise but will try (for one thing I’ve just had to move recently and I actually don’t recall seeing my Bill Williams books during the move which actually is very odd come to think of it as I type this message).
For what it’s worth though: Tom’s idea of adding lots of the same size as the trade goes in your favor does make sense though let’s face it.
Chat soonest then.
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Hey Tom,
Thanks for giving me your best. No sense addressing every point you made, but I’ll say this: I’m quite sure that I read that Seykota does keep his computer algorithm top secret, and I know from experience that one very popular teacher told me that he would not explain the whole story on a particular matter I asked him about unless I bought into his course. To hopefully bring the picture into what I consider a better balance, there are some guys that will not hesitate to give you their entire system, either by taking you through their live trades, or by entire, multifaceted free online courses.
Well, we certainly got off topic, didn’t we, which was . . . oh yeah: why add less at each level of a pyramid - which brings to mind Dale’s conclusion:
I always seemed to intuit that, and that’s what I’ll be testing first.
So, thank both of you guys for getting in the fray as it’s served to convince me as to how I should begin. And a purple heart for you Tom. You’re a valiant warrior. I did turn up the heat a bit, which I always try to keep to a minimum. Thanks for hanging in there with me and giving me your best.
Anyone else want to jump in with some on-topic insights or questions? Jump - at your own peril!
Happy trading,
Norm
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Hey Norm.
I’ve searched high and low for those Bill Williams books of mine but to no avail. Real curious as to what happened to them. Maybe I tossed them some years back and cannot remember (Bill Williams’ stuff was pretty dated back then already so it could very well have been in a moment of frustration for all I know).
Anyways and really to wrap this one up for you and possibly be stating the obvious: the key to pyramiding is moving stops and locking in profits or, at very least, ensuring that if stopped out it’s never for more IN TOTAL than your intended risk on the trade. By efficiently adding positions you can definitely compound profits even exponentially especially if you’re opening a new position based on your capital plus LOCKED IN profits on previously opened positions. But of course and if you’re not moving stops correctly this can count against you too and in spades to boot. And be careful with this too i.e. stops can be slipped or even totally ignored in the event of a black swan event. With a relatively small position this may only end up costing you a bit. But with multiple positions opened on this basis the loss could be substantial. Not trying to frighten you but it can and does happen from time to time.
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