Money management by pyramiding or scaling.
When building a "Pyramid" from money using the pyramid method - your foundation of the pyramid is knowledge and experience.
One of the main features of this method is minimal risks with high rates of income.
In let's look at an example on the chart. LTC is a strong uptrend. Entering a transaction is not from the bottom of the price itself, but when the trend is confirmed. Trading only according to the trend, exit of the price for trend aisles - means exit from the position. Stop loss is always 5% below the uptrend line that you are trading. As the price rises, the stop loss pulls up. This is very similar to positional trading. But unlike position trading, you buy an asset as the trend develops, thereby increasing the position.
From the example, we see that $ 20,000 is allocated for the coin. They are broken into at least 3 parts. 1 entry is the largest at the beginning of the trend-$ 10,000. The next 2 entries as the uptrend develops for $ 5,000. Risk is absolutely always observed 5% of the position. Breaking the uptrend line means a complete exit from the long market position. If you are not sure that the trend has finally reversed, you can exit part of the position.
In this example, the profit was $ 52,000 + $ 32,000 net. I also want to emphasize, we did not buy at the very lowest prices and did not sell at the very peak of the price, 2 transactions were done quite already at an expensive price. The main thing is to follow the plan, understand what you are doing and what is happening. It is necessary to kill the “herd instinct” in oneself, try to buy the cheaper, sell the more expensive, buy for good luck, work without a strategy and plan. You work like everyone else - it will be like everyone else - nothing!
Pyramid mechanics in numbers.
The amount allocated for this coin is $ 20,000. Broken into 3 parts $ 10,000, $ 5,000, $ 5,000.
Profit from purchase №1 of $ 10,000 + 225% = $ 32,500 (net $ 22,500).
Profit from purchase №2 5000 $ + 145% = $ 12,250 (net $ 7250).
Profit from purchase No. 3 of $ 5000 + 45% = $ 7250 (net $ 2250).
Total profit for all 3 purchases $ 52,000
Net profit $ 52,000-$ 20,000 = $ 32,000
The risk has always been 5%
Next, I will describe in more detail this method and all the nuances.
Money management by pyramiding or scaling.
The pyramiding method of money management (scaling) today is very popular among traders with experience. The essence of this method is the sequential opening of several transactions on the trend. We increase our position as profit grows, not loss.
Pyramiding method of money management is perfectly combined with a positional trading strategy. Also, this method increases the deposit well when a trader trades in upward (long work) and downward channels (short work).
Pyramid trading is a strategy that involves adding a new position to an existing profitable position. In other words, these are purchases or sales in order to add to an existing position, after the market has developed movement in a profitable direction for you. You are increasing your position. At the same time, the size of each next transaction may change taking into account the result of the previous one, that is, the position increases when you make a profit in the previous transaction to increase the deposit at a faster pace or after receiving a loss to accelerate the exit from the drawdown.
This is the main advantage of using pyramiding in trading. If you did everything right, then do not expose your trading capital to additional risk. In fact, you reduce risk as the market moves in a profitable direction for you. The main thing is to correctly determine the trend and "sit" on it. The most difficult moment is to determine the beginning of a trend.
On a bull trend it is better to always work on the bull side; on a , on a side. Always follow the trend!
However, just as pyramiding can be profitable, it can also be dangerous if used improperly. The main thing is to determine the trend correctly.
Many experienced traders consider this method the only possible way to quickly disperse the "deposit". One well-defined trend lasting only 1-2 weeks can double, triple the deposit with the right approach. Moreover, the risk is only 2% -5%.
It is very important, do not confuse averaging and pyramiding, since these two approaches are completely different. Averaging occurs when the price goes against our position. And pyramiding is the other way around when the price is in your favor.
Pyramiding allows you to achieve a super effective profit / risk ratio by transferring stop loss as the trend moves in your favor.
How to carry out a set of positions according to the trend, when to enter.
Another important issue in pyramiding is: when do you actually enter a deal, gain a position more? The answer to this question can be divided into several approaches. Each of them has its pros and cons and in different situations will give different results. Just who is comfortable and who is more used to what they trade.
Entrance to the transaction during the construction of the "pyramid":
1) On kickbacks.
2) On signs of continued movement. For example, it can be a powerful entry or a pattern.
3) During the breakdown of important levels.
How to use stop loss when building a "pyramid".
Naturally, with pyramiding, stop loss is used. It is recommended to use a separate stop for each entry (to buy the position). As the trend develops, it should be pulled up.
For example, I use 2 stop loss. Regardless of how much I had as the trend of inputs on kickbacks grew. The first is the top, which is about 30% of the entire position. As a rule, it is equivalent to the stop loss level of the last entry (buy by trend). The second is 70% of the position, this is when the trend breaks. Both stop losses are tightened as the trend grows.
It is logical to use stop loss outside of some important levels. The trader as a whole should decide on the overall risk that he is ready to bear. For example, it is 3% -5%. Therefore, it is necessary to calculate the following positions in such a way that, taking into account the profit of the previous steps, compensate for the loss of the subsequent ones and keep within 3% -5%.
You need to understand that with the correct determination of the trend, and the correct scaling of the pyramid, a loss of 3-5% is purely arbitrary, as long as you have a stop knocked out, you can already double or triple the total profit. The main thing with the price increase is not to forget to tighten the stop loss. And so put so that they are not knocked ahead of time. As a rule, I go out when stop loss is touched, just two, as the first one can knock out, and the price can go up further.
It is also worth adding that sometimes on some coins due to their , their feet are knocked out by 5%, so that this does not happen, the size of the stop is not so important as the moment of entry.
How to take profit when managing money using the pyramid method? There are several different methods of closing positions:
1) According to the planned profit. For example, you planned to take profit + 100% from this tool. You have reached your take profit. We left the position, took profit and forgot about this tool.
2) With a slowdown in profit growth. For example, you have already doubled the profit on this trend and this is quite enough for you. The trend has moved in a lateral movement, profit is not growing, or growing slowly. It is more advisable for you to close this profitable deal and transfer the profit to the trend that is emerging, thereby building a new "pyramid" on a more rapidly growing trend.
3) At the first sign of a trend reversal. Not breaking through important resistance levels, reversal patterns, breaking the .
4) By tightening stop loss. Knocked out stop loss. Depending on which stop loss ordering technique you use, either single or fractional for each entry separately. Stopped, took profits and forgot about this trading tool. They began to search for a new instrument with a good entry point at the stage of trend emergence. Started the construction of a new "pyramid".
In my opinion, a reasonable solution is to partially take profit at some maximum levels with the trend growing. I am also part of the position about 30% aggressively trading increasing the asset. An important point at local maximums I sell these 30% almost completely, I already shop a large amount of assets from the support if I trade in an uptrend. As the trend progresses, I constantly pull up the lower stop loss (main position). 70% of the position is exited when the trend unfolds completely.
Benefits of money management by pyramiding or scaling.
Pyramiding works well with strong steady trend movements.
The advantages of pyramiding:
1) the bistro is increasing the deposit.
2) minimal risks, and with the development of a trend, there are no risks.
3) psychologically comfortable trading due to the absence of great risks.
Disadvantages of money management by pyramiding or scaling.
As you already understood, pyramiding works well in the trending market. If the market turns into a flat or a trend movement is accompanied by deep pullbacks, then the pyramid can be destroyed very quickly. On few liquid, weak instruments, this method does not work! On cryptocurrencies, this method only works on TOP. Coins such as BTC , LTC, ETH.
This method does not work:
1) In lateral flat movement.
2) With a weak trend.
3) In a trend with deep pullbacks, in which there will be uncertainty about further movement and they will knock out stops.
To be continued...
Let's go back to our example of LTC / USD money management by pyramiding in a downward channel . When working long in an uptrend, we earned $ 52,000 on this coin from an initial deposit of $ 20,000. Round up to $ 50,000.
Divide the amount into 3 parts of the entrance. A less risky entry point is the first, like a coin at the beginning of its downtrend and a big profit from the uptrend. Therefore, the first purchase will be a large amount.
First purchase - $ 30,000
Second purchase - $ 10,000
Third purchase - $ 10,000
Stop loss is always 5% and moves behind the price of a downtrend. Stop loss should always be behind the downtrend line. (outside the upper boundary of the downward channel ). Breaking it will mean a potential change in trend.
As a result of currently open trading deals, we have a profit:
1 purchase for $ 30,000 + 42% = $ 42,600 (net profit $ 12,600)
2 purchase for $ 10,000 + 19% = $ 11,900 (net profit of $ 1900)
3 purchase for $ 10,000 + 0% = as soon as we opened a deal (there is now an option to break the downtrend).
The risk is always 5%
The total net profit of work in the downward channel is currently + $ 14,500
$ 6,400 total position
If all 3 sales target work out as planned, then the potential from the entry point:
1 purchase - $ 53400 (net profit of $ 23,400).
2 purchase - $ 17,000 (net profit of $ 7,000).
3 purchase - $ 16,200 (net profit of $ 6,200).
Total short profit: $ 86,600 (net profit $ 36,600).