Building a pyramid

V-shaped base in December, shows how much profit can quickly turn into big losses in the construction of the pyramid.

You are likely, like most traders, primarily concerned with the development of the trade plan, about whether, when, where and how to enter the market.

The second question concerns the position. Only then, in most cases, you might start thinking about the amount of your position.

Nevertheless, it is often the case, what is the size of positions to a greater extent than the input or output determines the success or failure in trade. Generally, the size of the position refers to the management of money, which is considered a matter for advanced traders, to study it after they learned the rest of the trade. However, the size of the position may be even more important for the beginner trader, with a more appropriate account for the positions of several lots, rather than one.

A simplified example of using the V-shaped foundation of the graph above illustrates what can happen when you are not careful enough, even when you are taking, it seems reasonable decisions regarding the inputs and outputs (prices rounded off to simplify calculations). Once the market has declined from the fourth vertex at $ 57, you sell a lot when the price falls below the 40-day moving average at 55 $ (A). Then, as the decline gets momentum, you sell an additional two lots at 53 $ (B), then prices are falling below the minimum in August-September, the usual movement, based on technical analysis. Now, do you think that you have captured the dynamics of the market and use the profits to sell four more lots for $ 48.50 when prices
dropped below the minimum in May (C).

At first glance, everything looks fine: with prices for a minimum of $ 47, you have a $ 10,400 profit in its seven short positions. But then the market turns sharply. A few days later, the price shot back up to an intermediate peak at around 51 $ (D).

Here is the status of your account when you reach $ 51 mark:

Selling 1 Lot of 55 $ ........................ 1.600 * $ 1 = $ 1.600 +
Sale of lots 2 to 53 $ ....................... $ 800 * 2 = + 1.600 $
Sell 4 lots on 48.50 $ ................... $ 1.000 * 4 = - $ 4.000
Total: - $ 800

Mindful of such a large profit, which you have, you do not want to accept the loss. Therefore, you hold their positions. Soon, the market is back to mark 53 $ (E).

Here are a condition of your account for $ 53:

Selling 1 Lot of 55 $ ........................ $ 800 * 1 = + $ 800
Sale of lots 2 to 53 $ ....................... 0 $ * 2 = 0
Sell 4 lots on 48.50 $ ................... $ 1.800 * 4 = - $ 7.200
Total: - $ 6.400

Your killing has become a catastrophe, even if the market initially fell, just as you were expecting. In fact, prices were only slightly higher than the level of $ 50.50 to get your position in the negative territory. You have heard of pyramid schemes, now you have experienced one of them in trade. Your last entry is the biggest and has the biggest losses if the market develops. In fact, you should make your first position of the largest, but it is not so easy to do when you can not, with certainty, belongs to the original signal - which is quite justified, because it can also be very dangerous if your signal will be erroneous.

Another option would be trading the same number of lots in each subsequent signal, while the number of lots would depend on the size of your account. For example, you can have an account, which can afford the four lots in paragraph (A), four in paragraph (B), four in paragraph (C) and four more in the low point - in this case, your «full entry» would have 16 lots. The market can not give you many opportunities like this, but you will not be exposing themselves to additional risk at any level of such market dynamics.

If you do not want to keep their profits in the market or to take more risk, you can manage this. Ideally, if the size of the positions that you sell, will provide an optimal balance between risk and profit. The purpose of such an optimal balance is based on how well, according to your expectations, your trading system will work and the size of your account. Some even suggest that you can focus on this aspect of trade and to forget about the entry and exit strategies, and while your results are quite satisfactory.