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Adding to Trades - Pyramiding

Adding to trades is an excellent way to increase your profits on winning trades.

If you have entered into a trade and you are currently in profit, your judgement so far is correct so in certain circumstances it may be a very good idea to increase the position.

For example: You entered a long trade on Gold September at $400 for £1 per point. Two weeks later, Gold is trading at $420 and so you are sitting on a potential profit of £200 (when trading Gold, a point is $0.1).

If the upwards trend still looks valid from the chart, it may be a good idea to buy another 50p or £1 per point to increase your position and profit. In your trading plan you may decide to include a strategy to pyramid trades in this way. The following methods can be used:

(a) Adding to a trade after a certain percentage move in the market

This plan involves buying or selling into a market when it has moved a certain percentage in the direction you predicted. For example: You open a trade on the DAX at 4000 and plan to add another unit of £1 per point if the market moves 2% in your direction. Therefore, you open a £1 per point trade at 4000 with a stop loss of 3920 and if the market hits 4080 you open another trade at this price. Your total position now is £2 a point at an average starting price of 4040.

(b) Adding to a trade at the next moving average level

Say you are running a strategy where by you buy or sell when the market moves through the 200 day moving average. If the market then moves through the 50 or 100 day moving average, add another unit.

(c) Use the Average True Range (ATR) of the market

This is probably the best strategy as it takes into account the current volatility of the market you intend to trade. The ATR can also be used to form a solid money management plan. The ATR is a measure of how much the market is moving per day on average. In the future, an article on this term will be added to this site but for now you simply need to know that it exists. ATR values for markets can be found from many different websites and also from programs such as ShareScope and OmniTrader. In this example it is assumed that you are running a £10,000 account and risking 2.5% per trade (£250).

For example: Let's say it's June you want to place an UP trade on the Dow Jones September contract. The Dow is currently trading at 10375 and the 20 day ATR is 92. On opening this position it would be sensible to let the ATR determine where to place the stop.

If the market moves against you for three straight days in a row it is fair to say that your judgement was wrong. Therefore, use 3 x ATR for the stop

i.e. 3 x 92 = 276

Now, your stop is 276 points way from your opening level so to risk £250 you need to calculate the risk per point

£250 / 276 = £0.9057... ~ £0.90 or 90p

Therefore, in order to risk £250 or less and use a stop of 3 ATR, you would buy the Dow at around 10375 for 90p per point.

Your total risk is now £0.90 x 276 = £248.40.

To add to this trade, wait for the market to move 2 ATR in your favour.

Therefore (as 2 x 92 = 184), buy another 1 unit (£0.90 per point) when the Dow has moved up to 10559.

If/when it moves 4 ATR above your starting price, add another unit and continue pyramiding like this.

Providing you use a trailing stop loss you can increase your profit as your trade moves in the right direction. At some point the upwards trend will finish but if you use a trailing stop of 2-3 ATR you will be closed out with a good profit. Pyramiding is an excellent strategy when the trade is going in your favour but it must be stressed that you should never Average Down.

In terms of share buying, averaging down is the process of buying more shares when the price of the equity has fallen. For example: Say you bought 300 Tesco shares at 320p. Two months later they have fallen to 300p so you buy another 300 at this price. You now own 600 shares at an average price of 310p. If Tesco rises again, you are more in profit than you would've been if you had stuck with the original 300 shares. However, if it falls further you stand to lose much more.

Averaging Down is a massive no-no when spread trading. Never try to do this to "get even" with the market. Losing trades are part of trading and you must learn to live with them.

With the correct money management and by pyramiding successful trades you can afford to lose more trades than you win and still make money.

Trading Strategy Examples

Trading strategies are used by all successful traders and, indeed, if you enter positions without one it is likely you will lose money - quickly. Put simply a strategy is a set of rules which is used to determine when to trade. When the markets aren't performing as the strategy requires, no trades are entered.

The advantages of using strategies are:

- They automate your decisions for you and, when followed properly, should remove emotion from your trading.

- They clear up any queries. A good strategy will tell you when to enter, how much capital to risk, when to cut a position and when to take your profits.

- They save a great deal of time. If you can use a system which works and stick to it, even through losing periods, you won't have to sit watching the screen all day. You can place trades and let the stop losses protect you.

A very simple strategy would be:

Buy on market open if it is Monday.

If back-testing has shown that the market has a bias for finishing up on a Monday then by buying a daily bet at the open and letting your trade expire you will be following the strategy.

This is very simplistic but often the best strategies are very simple. The hard part comes when you have to follow the rules even during periods of extensive drawdown (a series of losing trades). The Turtles used a very simple system which concentrated on market highs and lows. This system would involve trading through long periods where many trades lost money. However, over the course of many months (with the help of excellent and strict money management) the rules provided the group with massive returns.

A simplified version of the Turtles' strategy would be as follows:

Enter a long trade with 1 unit (see Adding to Trades) when the price of the market exceeds the highest high of the last 4 weeks.

Add another unit when the price moves 2 ATR above the entry price.

Continue adding 1 unit for each 2 ATR move above entry price.

Place the stop loss at a level representing 2% of capital. No more than 2% was ever risked by the Turtles. When adding units, stops were moved to be 2% of capital below the new unit entry price.

Positions are closed if the market makes a new low for the last 10 days.

This is a very simplified version, the actual Turtle rules can be found on OriginalTurtles.org or by clicking here (Opens in a new window). Another example of a strategy is to use a moving average to signify entry and exit points.

For example: You enter a long trade with 1 unit when the price moves above the 200 day moving average and exit when it moves below it again. (The opposite applies for short trades).

In the case of individual equities (shares) you could use the following as a strategy:

When the share has moved more than 5% in one particular trading session, open a trade in the direction of the move. Put a stop loss 10% below/above the entry price and calculate the risk per point from the position of the stop loss.

For example: In the previous day's trading BP has moved from 550 to 580.25 (an increase of 5.5%). Open a trade and put a stop at 10% below the entry price at 522.25. If you had £250 to risk, your total risk per point is:

£250 / (580.25 - 522.25) = £4.31 or £4.25 per point (rounded down). Your total risk is 58 x £4.25 = £246.50.

If the market continues to rise, use a trailing stop to lock in profit and exit when the price moves down more than 5% in one day. The above are simply examples of strategies, there are many more available both for free and in books and courses,

When using any strategy you must remember to discipline yourself to accept loss and let your profits run. Make sure you never lose more than you determine you can when placing the trade.

Never average down or move your stop further away from the market to avoid it being hit.