Short term trailing stop?

[kingie_d]

Hi everyone,
I was just reading in the latest Your Trading Edge magazine about a 'system' for pyramiding into a winning trade. It is based on a weekly chart, in which you determine the trend (in my example a downtrend) and put in a conditional order to 'enter' more into the trade every time the SP moves past the low of the previous week (short in my example. Opposite for long trades). You also move your trailing stop to the high of the previous week. The author suggests to pyramid only 2 or 3 times into the trade and my opinion would be to only pyramid into the trade once the original is at breakeven including commissions (to effectively give you a "free" trade). Obviously each new entry would be treated as a whole different trade and obey the 2% (or whatever u choose) position sizing rule.
For Example on this chart (weekly AIO):
After the retracement, your entry $ would be at '1' with the initial stop at 'A'
You would then set your next entry at when SP moves below '2' and move the stop to the top of that large red candle (oops forgot to put a line in!).
The week after you move your trailing stop down to 'B' with your next entry at '3' and so on and so forth.
I know I've presented a pretty basic explanation but I'm sure you all understand what I'm getting at.
What I ask is - what are your opinions about that sort of pyramiding and close trailing stops?
- Do you think that it is tradeable with a daily chart?
- Plus feel free to chuck in other ideas about this.
Yeah, thats about it, whadda ya reckon aboudit?

 

[CFD]

Other thoughts.
I think the market is ranging and AIO is not a typical example. When you get a situation such as AIO it's surprisingly hard to short, I'm with a CFD MM and still couldn't get short!

 

[peter2]

Pyramiding increases your profits from a good move and is definitely worth pursuing. I do something similar to this and it works, sometimes. Many times I exit at BE especially when I add aggressively. When I lose, I only lose the original amount that I was willing to risk to start the trade. You have to realise that by adding to the position you are risking open profits so when the move fails you lose your profits from the initial move. As long as you are comfortable with this then practice using it. Adding two more parcels to the first generally doubles your profits. The longer the move the higher the profits. You cannot imagine how good it feels when you add more and the move continues much further than you had thought. Mmm....

Trading weekly charts will seem much easier than trading daily charts. There is less work as you only have to do your analysis on the weekend and you can place all your orders before the Monday open. If you do add to your position and risk some of your open profits then you will experience the frustration of being in a profitable trade for a few weeks and then be stopped out at BE when the move falters after you add to it. There is no reward without risk.

There is one important psychological benefit of using pyramiding. As the position continues profitably you will be thinking of adding to it rather than taking profits. This shift in intent will make you think (and hopefully act) like a winner not a loser.

Now back on topic: My exits are generally 2x ATR(14wk) from the week's high. I don't wish to be kicked around too much by the daily volatility.

 

[kingie_d]

CFD,
I understand that the market is ranging which is why I was looking into this type of tight trailing stops to lock in profits in short term swings - and - using pyramiding as a way to increase your total returns due to small movements (as opposed to being able to jump on a trend, give it some slack, and let it ride).

Peter,
With the market the way it is now I think I would like to stick to daily charts and I might give this type of tight stops + pyramiding a shot. When the market finally settles and picks a direction I will get into longer time frames.
I think it is important to adapt your trading system/s to match the conditions of the market.

Pyramiding into a profitable trade , i think, is better than opening a whole new trade on a different stock. If you do it after the BE point then your risk should only be your 2% from the new trade - whereas your return will be based on the combined amount of both trades. Makes sense to me. But yeah I see how you can go from a profit - pyramid in - price changes on you - then you end up with a loss where you would normally have a small profit.

 

[BBand]

Hi KD,
Pyramiding into a successful trade is an excellent way to maximize your profits (especially in a trending market)

Its probably better to add to a winning trade than use the money to buy into a new trade, not knowing if its going to be a winner or not.

The main thing to ensure is that you do not violate your money management rules (risk)

The word pyramid suggests that the new trades that you add should become progressively less ($) -----

Not sure if pyramiding is a good idea at present, if you are just trading a move - the moves are a lot less frequent, not as big or as long as they tend to be in a trending market (having said that the XJO may well start trending down very soon - will be testing support shortly)

When the overal market is trending it tends to support trades taken in the same direction (a rising/falling market tends to lift/sink all ships)

Just something to think about

Peter