Pyramiding means adding equity to a position that has moved in the expected direction (i.e., the position is already profitable) and the method of pyramiding is the same for trading short as for trading long. Pyramiding is similar to Scaling In and Out of Your Positions. The difference lies in the entry. Scaling (a.k.a., averaging down) builds a position as the position retraces towards support for longs or resistance for shorts and towards the position's stop loss, which is typically just beyond that support or resistance level. Pyramiding, which is also known as Add and Reduce, builds a position as it advances (realizes a gain) and then finds another favorable setup. The trader uses the next setup to add to the current position and tightens (reduces the size of) the stop on the whole position. This approach increases the size of the whole position while still maintaining the original risk exposure. This approach is best applied to positions that are in a nice power trend. It also allows the initial entry to use half the size and twice the stop, which is an entry approach that allows you reduce your initial risk at the cost of reducing your initial profit potential, which can be recovered by using this add and reduce approach on the next setup. The trader has the option to average back out of the position, which I prefer to do (e.g., dump a little in a subsequent trust and maybe add back a little on the next successful retracement), or the trader can just exit the position when the power trend start to break down. Consider the following example 2 Minute Chart of INFY.

Another example of this approach is well addressed in the VCM Weekly Trading Lesson on Add and Reduce.

Pyramiding - Some Additional Comments

How do you decide when to pyramid your position? How much capital should I pyramid with?

Once we have a position in play that has enabled us to move our stop from an initial stop to a breakeven level and finally to a trailing stop we are faced with the issue of whether to add additional capital to a position.

Many like to say, "You should never throw good money after bad by buying more of an issue that is not trending according to your initial expectations." This is called 'averaging down'. And by deciding to ignore your initial stop, and buy more of a down trending share, your average purchase price may be lower; but the amount of capital that you have in the trade would have increasing and losing value. Following this strategy, you may be ultimately holding a large parcel of down trending shares that are draining your trading equity. Often people follow this course of action in hopes of turning a losing trade into a winning one. This hope is well founded because this strategy tends to work out when the position is in-synch with the broader (longer-term) market trend (e.g., going long in an up trending issue); but if the broader market trend has turned and your building your position in the face of that turn, you will be forced to take an increasing loss. Another disadvantage is that your capital is tied up in this near-term losing position. If you're going to average down, be sure to properly share size the position into the support or resistance level that you ultimately expect to hold; but if it does not, Do Not ignore your stop! But many do not honor their stops; and that's why Pyramiding is considered a superior strategy because it only allows you to add to profitable positions.

When to Pyramid

If you have moved your stop to break even, and the share has continued to trend in the direction you were expecting, you could add money to your winning position. The way to do this is to set 'land-marks' which will help determine when this action is appropriate. This land-mark should be the prior pivot that confirms the current trend. Recall that an up trend is defined by a pattern of higher pivot highs and higher pivot lows, and that a down trend is defined by a pattern of lower pivot highs and lower pivot lows. In an up trend, the land-mark or stop should be set below the prior higher pivot low; and in a down trend, the stop should be set above the prior lower pivot high. The basic idea is that if the prior pivot is violated, so is the trend, so exit to preserve capital.

If you set your initial stop based on patterns, you could move your stops, or decide to pyramid based on an appropriate pattern appearing. If your initial stop was made due to a trigger by a specific indicator, if you get another signal from this indicator you could decide to move your stops, or pyramid.

Pyramid Position Sizes

As the name suggest pyramiding involves the addition of sequentially smaller amounts of capital to any given position. The additional capital put into into a trade should occur with smaller increments of the initial amount. For example, if you position sized based on 1% risk, your subsequent pyramid amounts could be based on .5% risk and .25% risk.

Stan Benson