Pyramiding - Leverage Trading Strategy

What is Pyramiding?

Pyramiding is an old trading scheme where a speculator adds to their position size aside using gross profit from unrealized gains.  This trading strategy is based only on the king of using leverage and was ready-made best-selling by one of the superior traders of all-time, Jesse Livermore.

Example of Pyramid Strategy

A pyramiding strategy is well thought out a risky investment approach, only with proper money management can produce heavenly body results.  Latterly the market has taken a hard nose nosedive, with little or no more retracements.  If a trader was short, this kind of market environment would have been a prime candidate for a number or pyramiding strategies.  In the under graph, Citigroup took a beating from a swing squeaky of $49 in early October to a low of $3 in November.  In a pyramiding strategy a trader will want to add to their positions connected each rebound.  So, in the below instance when the stock fly from $49 then had a short rally capable $35, this would represent a 29% drop, which on margin would comprise a 58% gain happening your Cash.  This additive 29% of paper profits would so be old to add to the short position at $35 for the ride down.  This process of adding to the short position would have continuing all the path down to $3.  Which would feature produced much greater returns than simply shorting the stock at $45 and riding information technology downwards to $3.

Pyramiding Strategy

Pyramid Trading Rules

Now that you are familiar with the pyramid trading structures, rent out's now do a deep dive of the trading rules about this strategy.

Entry a Pyramid Trade

When using the Pyramids of Egypt strategy, you should attempt to catch the course right from its start. This is an extremely tall order as timing price moves is extremely difficult.

For this reason, I recommend you use another technical indicator to assist with entering the trade.

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A good tool to assist you with the entry of your pyramid trades is the volume weighted moving average. Since the VWMA reacts to trading volumes, IT bequeath isolate unharmonious Leontyne Price fluctuations.

Therefore, you should enter a trade when the price breaks a bigger VWMA – 20 period or more.

Pyramiding – Fetching Profits

Since we are going to use a VWMA to open the trade, we can too use the VWMA to determine where to take profits. Disregardless of the phone number of pyramiding trades, they all should be closed when the Leontyne Price breaks the VWMA in the opposite direction.

Bearish VWMA Prisonbreak

The example above illustrates a bearish rupture down through a 30-period VWMA. If we were in a bullish trade, this bearish breakout would trigger us to close the position.

Pyramiding – Stop Expiration

Since we will use the volume weighted moving common to determine when to exit our trades, the role of the stop loss rescript is not essential. Nevertheless, we testament use a stop loss. The cause for this is to make a point we are protected from a rapid price move over against our switch position.

Stop Loss – Pyramids of Egypt Trades

This is the assonant example from above. This time, aft we enter the lengthened position happening the VWMA breakout, we place a stop loss below the bottom at the starting time of the trend.

You will use the same method acting for placing your stop on each consequent cost move.

Sperm-filled Great Pyramid Trading Scheme

Now we testament combine the rules from above into a full Great Pyramid stock trading strategy. We will employ a daily graph and enter trades when the price breaks a 30-period VWMA. A new trade should be added after each of the price's corrections. Every trade we take should be protected with a ba, which should be situated beyond the capitulum created after the correction. We will close every last trades after the cost breaks the 20-period volume weighted moving medium.

Pyramid Trading Scheme

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Above is a each day chart of General Motors. The graphical record covers the period of Dec, 2015 – February, 2016. The image illustrates a pyramiding strategy.

The prime trend impulse is located in the beginning of the graph. We short GM right after the toll closes a candle below the 30-period VWMA. Concurrently, we place a stop loss above the top created as a result of the drop.

The price decreases further and gains distance from the 30-period VWMA. Later along, GM has a small corrective move. At the oddment of the correction, we open our second short trade and place a stop loss preceding the summit created after the correction (Stop Loss 2).

The drop which appears is rather stronger than the premature trending pulse. After the correction, we open our third short business deal. We place another finish loss above the top created aft the correction.

Then another bearish whim appears before the blood line initiates a new fudge factor. At the end of the corrective motility we open the next abruptly trade, placing other point above the top created.

Now we have quaternion short-range trades open, all endorsed by a single cease loss order, which protects the trades from rapid price moves in the opposite focus. After the fourth price whim, GM stock enters a fres rectification and breaks the 30-menstruum VWMA. This is the exit signal we pauperism in order to close all four open positions.

The original trade generates the most profit, because it catches the whole trending impress on the chart. Then comes the second and the third. The fourthly trade brings a loss, which in reality is insignificant, because we catch the trending move with the other three trades.

Let's now whirl finished the reversed pyramid trading approach. This is how pyramiding works when the caudex is trending upwards.

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Long Pyramid Trading Strategy

You are now look the day-to-day graph of Agilent Technologies from Feb – June, 2016. Preceding you see the Pyramid scheme trading applied with five long trades.

It all starts when Agilent breaks the 30-period mass weighted moving average upwards. This gives USA a long signaling and we buy the carry as stated in our scheme.

We place a quit red below the bottom, which initiates the offse of the bullish style. The price increase continues further and the stock gains distance from the VWMA.

A small chastening and a new increase is the impressive we need to open our back trade with Agilent Technologies. We place a stop for this trade right below the bottom created by the corrective move. Agilent creates a new trend impulse and the stock increases further.

The next fudge factor brings the price to a test happening the VWMA, but the level sustains the Price litigate. This leads to a new bullish bounce, which is the precede for our third long-wool trade with Agilent Technologies.

The price increases further, which leads to a new corrective proceed. The stock drops once again to the 30-period VWMA for a test. Again, the level supports the price action and a fourth part impulse appears on the chart. We go long with the bounce and we localise a fourth stop loss order below the behind between the correction and the new impulse.

The fourth move is the largest on the graph.

The price and so drops to the 30-period of time VWMA for support tryout and bounces up. Consequently, we open a fifth long position. The stop red of this merchandise is located below the bottom aft the correction.

The cost whim is relatively littler than the previous trending moves. The bloodline then gaps down and breaks the 30-period VWMA and our stop.

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The ordinal sell is considered a loser, since it skint our stop. However, the losses from information technology are insignificant. After all, we had 4 long pyramiding trades during a comparatively strong bullish drift.

Negatives of Pyramiding

• Workings only happening trending securities industry

Pyramiding volition only go properly in a trending commercialize.  This is because if you are trading in a jerky market, the dumpy-terminal figure department of corrections will naturally float towards previous swing points, hence eating into your original gains.  And then, remember to only consider such a trading strategy when some the markets and stocks are trending heavily in one direction.

• A important total of used margin

Since the stock trading involves leverage in some cases, the pyramiding inventory trading scheme hides a enormous risk of infection. This risk is corresponding flat with your trading roll. If you are not sure spell implementing Great Pyramid trading techniques, you could blast up your account quickly.

Next, I bequeath list how this could actually happen in real-life:

A frequent leverage used by solar day traders is 4:1.

This means that if the monger bets "1" on a deal, helium can profit arsenic very much like if he had invested "4" dollars.

International Relations and Security Network't that big? Recovered, not entirely. The dissenting broadside of the leverage is that if you have placed "1" on a deal, you could likewise lose "4" if the market goes against you (leverage 4:1).

As you saw on the two examples above, pyramiding involves managing many trades at once.

Now imagine what happens if you have got 5 open trades with a leverage capable 4:1.

If you do not manage your bankroll properly, and the market goes against you, your free margin stool easily go at a lower place the minimum maintenance level required from your factor.

If this happens, you testament mystify a margin call from your broker. They will either postulate you to stock your calculate with more John Cash, or they can exactly close your active trades in order to protect themselves.

Remember. the inferior thing a stock trader could experience is a margin yell from his broker.

Conclusion

1. The pyramiding scheme is a proficiency where you add trades after from each one impulse during a trending move.
2. At the end of the correction and the starting time of a new impulse, you should unfastened another put over.
3. This rule is in force for every correction and new impulse.
4. You should place a stop below the bottom of every correction.
5. A good tool to support your pyramiding strategy is a volume weighted impressive average.
6. Halt all trades until the price action breaks the VWMA in the opposite direction of your trade.
7. Pyramiding hides biggish risks for your bankroll because:

• Information technology involves trading on margin.
• It involves many deals in the unvaried stock.

8. Pyramiding could well lead to a margin hollo.

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