The Logic of Profit Pyramiding in Trading:
I believe that pyramiding of profits is a poorly understood concept among the great majority of traders. It is certainly much less used in practice than its exact opposite, averaging down, also known as adding to a losing position.
Reading Reminiscences of a Stock Operator, a book which is almost 100 years old, one notices that even then pyramiding wasn’t a trading novelty:
He sold short one hundred shares of Lake Shore. That was the time Bill Travers hammered the market, in 1875. My friend Roberts put out that Lake Shore at exactly the right time and kept selling it on the way down as he had been wont to do in the old successful days before he forsook Pat Hearne’s system and instead listened to hope’s whispers. Well, sir, in four days of successful pyramiding, Roberts’ account showed him a profit of fifteen thousand dollars.
So why isn’t it more popular today ? To answer this question, let’s see the two psychological prerequisites for successfully implementing pyramiding:
First of all, patience. A winning trade has to be open for a certain period of time to accumulate profit before you can start adding to it.
Secondly, lack of fear. In other words, you shouldn’t be itching to close an initial winning trade and book the profit, for fear that the market will reverse and take it back.
How long does it take a trader to develop the above qualities ? Years. About the same amount of time needed to develop the technical understanding of the markets required to carry out a successful pyramid trade.
So you see, because it’s actually work, it doesn’t lend itself to the usual marketing targeted at traders: sexy, get-rich-quick or no-brain-required. I guess that’s the answer why you’ll hardly ever hear about pyramiding from your local trading guru.
The point of this article is to raise awareness and get the readers to think about this concept. As with anything in trading, there’s no magic formula to tell us exactly when and how much to pyramid. Nevertheless, it has produced trading fortunes in the past and undoubtedly will continue to do so in the future.