Pyramiding is a trading strategy where you gradually increase your position size in an asset that’s moving in your favor. Imagine a pyramid being built, one level at a time. In this analogy, each level represents adding more to your position as the price goes up (for long positions) or down (for short positions).

Here’s a step-by-step approach to using pyramiding:

1. Start Small: Begin with a relatively small initial position to limit your downside risk.
2. Define Entry and Exit Points: Set clear entry and exit points for your trade using technical analysis or other trading strategies.
3. Add to Winners: If the price moves in your favor and reaches a predetermined point, add more to your position. This can be a fixed amount each time or a percentage of your account.
4. Strict Stop Loss: Always maintain a stop-loss order to limit potential losses if the price reverses.
5. Manage Risk: Carefully manage your overall risk by ensuring your total position size stays within your risk tolerance.

It’s a bit hard to understand what this means with just an explanation so we’ll use an little example to help illustrate what Pyramiding is.

Let’s say you’re bullish on a stock trading at $50. You decide to buy 100 shares (initial position) as a starting point, which is 2% of your capital. You also set a stop-loss at $45 and a first profit target at $55.

• If the price reaches $55 (your target), you might buy another 50 shares (adding to your position). You now hold 150 shares.
• Adjust your stop-loss to a trailing stop, maybe $2 below the current price ($53 in this case) to lock in some profits.
• If the price keeps climbing to $60, you could add another 25 shares (maintaining a percentage increase in your position size). You would now hold 175 shares with a higher profit potential and a protected portion of your gains through the trailing stop-loss.

Remember:

• Pyramiding is a high-risk, high-reward strategy. It amplifies your gains but also magnifies your losses if the market moves against you.
• Only experienced traders with a solid risk management plan should attempt pyramiding.
• Backtest your pyramiding strategy on historical data before risking real capital.

By following these steps and understanding the inherent risks, you can potentially leverage pyramiding to maximize profits in trending markets.

Now you might be thinking this sounds a lot like DCA and Scaling In which we just talked about last week and you’d be right! There’s a fine line between scaling in and pyramiding, and the terms are sometimes used interchangeably. Here’s how they differ:

Similarities:

• Both involve entering a position in parts, adding more shares or units as the price moves favorably.
• They aim to reduce risk by avoiding a single, large entry point that could be at a disadvantageous price.
• Both can be used for long or short positions.

Differences:

• Risk Profile: Pyramiding generally suggests a more aggressive approach. You might add a larger percentage to your position size with each addition, aiming for amplified gains. This also increases potential losses. Scaling in tends to be more conservative, adding smaller amounts with each purchase to gradually build your position and limit risk.
• Price Direction: Pyramiding often implies adding to a position specifically because the price is moving in your favor. Scaling in can be used for this purpose, but it can also be used to enter a position gradually even if the price isn’t moving much, with the goal of averaging down your cost basis (buying some shares at a lower price and some at a higher price).

In essence:

• Scaling in: A more cautious approach to entering a position in parts, potentially averaging down cost basis.
• Pyramiding: A riskier strategy of adding to a winning position with the goal of maximizing profits, potentially amplifying both gains and losses.

So, while they share some core concepts, pyramiding emphasizes amplifying profits in a trend, while scaling in focuses on managing risk and potentially averaging down cost.