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A single contract with fifty grand to back it and one more contract when the market moves in the right direction. He could put in a buy stop order to buy another one when it rallies 30 cents to $5.70 as the initial contract purchased at $5.40 would show an open profit of $1,500 and provide the financing for an additional contract. Suppose a trader has $50k in his account and he buys a September wheat contract on a breakout at $5.40. This represents a price swing of 30 cents (5,000 bushels * 30 cents = $1,500). The margin for a 5,000 bushel wheat futures contract is currently around $1,500. Knowing what not to do is just as important for your trading success as knowing what to do. This sort of pyramiding is the most aggressive way to apply the strategy…and the most incorrect way to do it! So let’s go ahead and talk about this misapplication first and put it to rest. The novice trader might read a get-rich-quick trading book or talk to some sleazy broker that teaches them to buy a futures contract and add more just as soon as it has a big enough open profit to cover the margin for another contract. This is a financial nuclear meltdown just waiting to happen. Unfortunately, a lot of new commodity traders first learn about pyramiding with the worst application possible.
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Otherwise, all you are doing is taking bigger risks with bigger positions.įrom my point of view, adding more contracts without trailing the stops on the other positions is not pyramiding it’s simply engaging in bad risk management. In pyramiding, you only add to your position when you’re in a trending market that is moving in your favor.įurthermore, when more contracts or shares are added, the protective stop orders for all the previously acquired contracts should be moving up as well in order to reduce/eliminate the risk on these contracts. It’s certainly not where you average down on a position and buy more and more shares of a sinking stock, either. It is important to understand that pyramiding a position is not like the traditional strategy of dollar cost averaging where you continue to add a predetermined amount to your investment in time increments like the guy who socks away $500 each month into his mutual fund portfolio. You increase your position size as the trend proves itself and your profits grow.
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Pyramiding a position simply means that you continue to add more and more contracts or shares as the market moves in your favor. This is a legit way to ramp up your profits on a winning trade. No, this is not some new MLM scheme like your dead-beat cousin Eddie is trying to get you to sign up for. What I’m talking about here is building a pyramid. Unlike in poker, where you have to up the ante and increase the amount of money you must risk in order to stay at the table, this strategy can allow a trader to keep the initial risk size the same –in some cases, even lower the amount of risk on the trade- and capture even more of the upside of a winning trade.
#Million dollar pyramid winner how to#
Now that you know how to determine the reward-to-risk ratio on the trade, I want to discuss a strategy that one can use to potentially increase the reward side of that ratio for any given trade. Just divide the potential reward amount by the initial risk amount and, voilà, you will get the targeted reward-to-risk ratio for the trade. The difference between the entry price and the minimum price you expect it to get to if you’re right is the potential reward on the trade. The difference between the entry price and the initial protective stop tells you the risk on the trade. To calculate the reward-to-risk ratio on a trade, you have to know where the position is being entered, where the initial protective stop is being placed, and where you expect the market to go if the trade is successful. I can be wrong 80% of the time, and I’m still not going to lose.” What five to one does is allow you to have a hit ratio of 20%. Jones said, “ Five to one means I’m risking one dollar to make five. This is why Paul Tudor Jones only takes a trade where he expects to get a minimum of a 5:1 reward-to-risk ratio. If the payoff of a winning trade is multiple times larger than the risk and subsequent loss on a losing trade, then you can net out a profit even if you have a lot more losing trades than winning trades. His comments address the subject of the reward-to-risk ratio on a trade. George Soros once said, “ It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”