def. “Pyramiding” is stock trading method of increasing your position size, or buying more stock, as the stock price moves in your favor. When a stock moves in your favor and starts to show a profit, there is actually less risk. Explanation: For example, if you bought a breakout at $150 and it went up to $154, your buy more stock. If it went up again to $158, you will buy more stock. Jesse Livermore the legendary trader always talked about “pyramiding” his position to make millions of dollars in the stock market. You can triple your profits. Anytime he was right in his judgement, he would add more to his position. There are a few techniques when “pyramiding” your position
How To Pyramid Your Position
Jesse Livermore Method of Pyramiding – A fairly simple technique, but very risky. You will split your full position into 4 trades. Each time the the stock goes up you will buy more until all 4 trades are complete.
Example: If youwanted to take a 1000 share position you would by the first 200 shares at the breakout . When the stock goes up you would buy another 200 shares. Another 200 would be bought a it went high, and finally the last 400 shares would be bought at the next upward movement.
Average True Range (ATR) Method of Pyramiding -With the ATR(20) set to a period of 20, you will increase your position every 1 ATR. You can increase your position up to 5 times max.
Example: Say at Apple stock broke out at $450, and the ATR(20) = 7. That would mean you will increase your position every 7 points.
Your next buy points would be
You bought the breakout at $450
450 + 7 = $457 is second buy point
457 +7 = $464 is third buy point
464 + 7= $471 is fourth buy point
471 + 7= $478 is fifth buy point.
Which Method of Pyramiding is Best?
Typically The ATR Method is best when trading very large markets, like gold ETF’s, commodities, Forex, and Indexes. The Jesse Livermore method is typically good for stocks, which are a much smaller markets. Jesse’s method is very risky, and just analyzing total portfolio risk using his method but he made millions doing it.
It’s ok to blend the two methods in either type of markets. The key is to keep an eye on TOTAL PORTFOLIO RISK at all times. You want to keep total portfolio risk at 2% max. In other words if you get stopped out of the trade, the loss on the total value of your account should not be more than 2%. If you have a $10,000 trading account you should not risk more that 2% of that or $200 per trade. When a stock moves in your favor, the probability of it continuing is greater, and the risk is decreasing because of profits made. Therefore it’s ALWAYS best to buy more stock when it’s going up.