Pyramiding on - what is it?
Pyramiding or gradual entry/exit is used by many traders, and the more trading depositThe more often they turn to a trading strategy based on pyramiding. What is it for and what is so good about it? I want to offer my perspective on this question, backed up by two years of experience in daily trading.
What is pyramiding?
I'll tell you right off the bat. pyramiding - it is not a grail that will give you a lot of money, as a rule the average return does not change, the main purpose of pyramiding - is risk reduction. It indirectly improves trading because it allows you to increase your leverage a little bit.
Let's take a look at How pyramiding works in detail.
When trading on the basis of the strategy pyramiding there are several types of risk:
1) Risk strategies - This is the main type of risk, which is implicit in all strategies - the risk of being wrong in the forecasts, and getting a loss from "the price went the wrong way".
2) Technical risk - is the loss from "ayyyyyyyyyyyyyyyyyyyyyyyyyyyy!". Price entry error (for manual trading), hanging internet, terminal, execution (especially important for arbitrage and scalper strategies), etc.
3) Risk of complete bankruptcy of the issuer/broker. Naturally, this type of risk pyramiding cannot reduce it.
As an example pyramiding let's take a simple breakout strategy (I'm not saying it's profitable, just an example).
There is a simple price average with a period of 13 hours, and a spread for the price in 1%. As soon as the price goes beyond the average+1% up, we buy, as soon as the price goes down beyond the average-1% - we sell. Reverse strategySo there are no stops as such. Pyramiding would be that we would "smear" the spread.
For this, two additional parameters are set: minimum buy/sell lot (let it be 1pc) and increment spreadwhich determines how much the spread changes for each next lot. For certainty, let maximum entry will be 5 lots, and spread increment - 0.1%. As a result, we will buy gradually - 1 lot at a price >=the average + 1%, another 1 lot at a price>=the average + 1.1% and so on. We will also sell gradually at price<=average-1%, then price<=average-1.1%, etc.
Let me say right away, for intuitive traders, do not be frightened by the complexity of the strategy and the piles of numbers, pyramiding it is quite realistic to do on unformalized trading strategies - Just always enter/exit no more than 1 min. lot at a time. If you want to enter, enter on a min. lot. For the next entry, wait for the next opportunity. For the exit the same way.
Advantages of using pyramiding
What is all this for? This reduces the risks. The strategy risk is reduced because instead of one strategy we essentially start using 5 (!) at once (in this example), each of which has its own profitability and its own risk. And someone out there (can't remember the last name) proved that when we split the portfolio into strategies, the total return averages out and the risk drops. The main thing that resists this decline is strategy correlation among themselves. Accordingly, the "smearing" of strategies should be noticeable. Often there should be situations where you enter partially, not only enter fully, in 5 steps at 5-minute intervals. On the other hand, it has been proven that very many strategies give little effect, i.e. it is best to divide into 5-7 parts. More makes no sense.
Technical risk when using pyramiding also decreases, because if you made a mistake at the current entry, the chance of the next one in the near future drops sharply. If you are "screwed" with the price, the next time, if the pause is not very big, you will look carefully where you enter. If you "messed up" with the execution, you just won't make the next attempt until the problems are over (or restart). terminalYou will go to the backup server, etc.). Of course, this is more relevant to arbitrage strategies or in trading illiquidity, where you have to hold active orders for a long time until they are executed.
The disadvantages of using pyramiding on the exchange
The downside pyramiding is a trivial increase in the number of orders and transactions. This is especially true for manual trading. For robot trading it is not so problematic.
More about pyramiding
What other subtleties arise in pyramiding? For example such a point as necessary severe limitation of the maximum input. This is a purely psychological moment: in normal trading there are only two states of mind "I'm in position" and "I'm in the cache". With a gradual entry there is such a desire as "a little more, a little more, the last entry is the best...". (especially if it's a counter-trend strategy). So you can't! A very dangerous desire. You should set a hard limit on the maximum entry beforehand. If it reaches it, stop, do not open more, even if more attractive prices appear. It is quite possible that this is a change of trend and losses will be incurred at the end of the day.