Scaling into positions are some things that a lot of traders do the other of, to their detriment.
Pyramiding is a term used to describe the adding of more shares or contracts to the existing profitable position. As a stock rises in price, progressively smaller parcels are bought at higher prices until the specified position size is achieved. When done correctly, pyramiding may be a highly effective to increase your profits during a trade.
Rules to safely add to winning positions:
- Pre-determine levels entry for additional units
- Calculate your risk with the additional units added
- Trail stop loss to stay growing position within comfortable risk parameters.
Add to a winning position, setting break even stop losses as the winners come in. So during a worst case scenario you lose nothing or simply little or no . In a best case scenario you stand to make a huge profit.
Make each new trade smaller than the previous one when adding to winning positions; ensure the total trade has stops so you end up breakeven at worst after each pyramid; and compute beforehand what percentage times you’re getting to pyramid your trade.
When planning a trade, a trader should usually pre-figure the total position he or she wants to hold and will pyramid up to it, by adding 2 or 3 smaller parcels, each 1/2 of the previous one. For example, if one wants to buy 7000 shares of XYZ, he or she may first buy 4000 and if the trade follows through according to the plan, the trader will add a further 2000 and finally a parcel of 1000 shares to complete his or her position.