Trading Strategy: Pyramid Your Profits!

By Jordan Weir

Are you one to throw caution to the wind, or do you cut your losses short, and let your profits run? It may surprise you to realize that while many traders think they cut their losses short, and let their profits run, there is a simple technique that will allow them greatly amplify those profits, while keeping their losses manageable. This technique is known as pyramiding your profits.

Risk management is one of the most crucial elements of your trading system. Badly managed risk will lead to eventual losses, while well managed risk will lead to profits. A basic principle of speculation is that no more then 5% of your portfolio should be at risk during any trade. On a $50000 portfolio, thats $2500 at risk. This does not mean that you cant invest more then $2500 into a given trade, but it does mean that when setting a stop loss, you need to decide on position sizing accordingly.

This can be easily demonstrated with an example. Let us say we have company XYZ trading at $20. There's strong support at $18, so we set a stop loss for 17.50. This means we have a potential $2.50 loss per share. If we are risking $2500, and can lose up to 2.50 per share on this one, 1000 shares should be our maximum position size.

Now lets say the stock then moves to 22.50, and you move your stop loss to $21. At this point, you've looked in $1000 in gains. To pyramid your profits, you then add shares to the position based on the profit made so far. At this point, you have made $1000 in gains, and your risk amount was $2500. Add these numbers together, and then divide by the difference between the current stock price, and the stop loss to get the number of shares you should add to the position. So 1000+2500=3500/1.50=2300 shares. By doing this, you greatly increase how much you make if it continues to go up, while still keeping losses minimal should it go against you.

So to recap. Stop loss at 21, we bought 1000 shares at 20, and 2300 at 22.50. If it goes down to 21, we gain 1000 on the first 1000 shares, and lose 3450 on the batch of 2300 shares, for a total loss of $2500 " the original risk amount. However, if it goes up to 25 as we originally forecast as our profit target, we've made $5000 on the original 1000 shares, and another $5750 on the second batch of 2300 shares. This is a total gain of 10750, while never risking more then $2500 in capital. The same idea can be applied to shorting as well. Its all about doing more of whats working, and less of what isn't.

This strategy is useful both for long term investors, and for shorter term traders. Long term investors can use this to scale into upwards trending stocks to safely generate massive profits, while shorter term investors can use this strategy to minimize risk, while maximizing their overall gains.

You may have heard the saying, you never go broke taking a profit. This idea is the polar opposite to pyramiding your profits, and is in fact, dangerous. To succeed in the investing world, your profits must be substantially higher then your losses, and that is whats accomplished by a trading strategy such as pyramiding your profits. Cut your losses short, and let your profits run.

The key to success in trading is to have big gains, and small losses. By doing so, you can be wrong half the time, and still make money in the market. By pyramiding your profits, you insure big gains and small losses. Using this stock trading strategy, you can truly cut your losses short, and let your profits run. - 23229

About the Author:

Don't even CONSIDER trading another stock before checking out Jordan's website on Stock Trading Stategies. Learn about Stock Option Stategies, ETFs, shorting and more by visiting the Stock and Options Guru! If you want to make money trading stocks, you need to see this information!