How to properly pyramid a position

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In this Trade School post, I present how to properly pyramid a position.  It is not a hard concept to grasp, but many aspiring and even experienced traders make mistakes when building positions. Here is the right way to do it.

The Problem: 

Pyramiding can quickly get you into trouble

The allure of building a monster position in your favorite stock and have it do a “moonshot” is great. We see visions of grandeur, fame and fortune as our stock goes up. We keep adding to our position at every opportunity.  We think to ourselves, monitoring “risk” is for losers. Besides, this time it’s different. As paper profits pile up, we become emotionally attached to our rocket ship. Then we see a couple of red bars. Just a dip. Add some more. As the stock falls apart, we see our “fortune” evaporate and turn to dust. I know what you’re thinking. I would not be that dumb. I’d be getting out near the  top.  Believe me, you won’t.  I personally know 3 people that were devastated by pyramiding the wrong way.

  • A friend of mine in the dot com era, pyramided a trading account from $250K to $12M and rode it back to near zero.
  • A trading buddy of mine  took Micron $MU from a small position to over $500K and rode it back to near zero
  • Around 2011, I built a monster position in Gilead that was worth several hundred thousand. All was right in the world until I woke up to the news that $CVS was dropping Gilead’s HIV drug from their formulary.  The stock dropped $15 in 30sec in the pre-market. If you know anything about options, such a drop will wipe you out. It was a painful lesson.

It usually ends the same way but it doesn’t have to end that way. If you follow a few simple principles you’ll stay out of trouble as your favorite stock goes up.

The right way to pyramid a position

There is a right way to pyramid a position. In this short video I will show you the right way to do it. While I would never endorse building a position greater than 5% of your trading account, this method will keep you out of trouble on a market reversal and keep the vast amount of your position profitable.

Take a look and see what you think. The video is approximately 12 minutes.


Pulling it all Together

When building your position remember to look on the back of the Dollar bill for your instruction set.  Make your first buy your largest one, then build your position by adding smaller and smaller increments as the stock advances. Keep your maximum allocation to 5% or less of your account. When you’re done building your position, keep your eyes open at the top.

I hope this helps you in your trading. If you have questions or get stuck, please reach out. Happy to do my best to help.

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