Once you get into a position and the market shows signs of moving in your direction, what else can you do besides ordering that new red sports car, hehe? Many commodity traders like to add to their position.
If you plan to take on additional contracts, do so in a reasonable manner. Pyramid profits from a large base with smaller increments, not the other way round a la K.R., please.
You like sleeping at night, right?
So pyramid 3-2-1, or 4-2-1, or 1-1-1 (which ought to be called *pillaring* rather than pyramiding) but never do the inverted pyramid like 1-1-2-4-8 etc. Nothing can be more dangerous, nothing can (and will) kill you faster.
When exiting a profitable trade, for some position traders it may be a good idea to sell into strength and buy into weakness. For example, lets say you have acquired a ten-contract position in a bull market. Rather than simply selling all 10 lots at once, you may begin to sell a couple of contracts on each rally untill you have liquidated the entire position.
By selling into strength, you will avoid the rush to liquidate once a market peaks. Conversely, the reverse is true when youre exiting a bear market. You will then want to buy or cover you short position on weakness.
Pyramiding is probably the fastest way to make a killing in the futures markets, theres no fuss about it. But surprise, surprise, it is also very very risky. If you are going to pyramid, do it right. Put your base on at the beginning of a big move, and add as fast as your funds permit. This will keep your average price at a manageable level and enable you to derive the maximum benefit from the market move.
When pyramiding, you must act fast or not at all. Write down the price levels at which you plan to add on, and then follow thru on this plan. Once the market fails to behave as you anticipated, however, you must be prepared to get out in a hurry, regardless of losses, just to save your butt from fire. And it burns, folks, burns like crazy. Believe me. Been there.
Your trading plan should pinpoint all potential trouble areas.
Also your exposure should be limited on each and every trade (regardless whether pyramiding or not) to a predetermined amount of money. Your mental or actual stops generally will prevent you from letting a loss get out of hand. The best method is to set a percentage of your total trading capital, then translate this % into a dollar amount.
A bad habit to get into when you trade futures is to keep writing checks to your broker (no kidding). Start out the year with the total amount of money you wish to commit to the market, and let that be the last check you write that year (…or at least that month… or a week hehe). Seriously. Should your equity shrink below a reasonable level, you should take this as a sign that you are making too many mistakes and that you should stop trading for a while.
Food for thoughts.