PYRAMIDING PROFITS Many a trader has begun at the bottom of a Bull market to trade conservatively and accumulated a large amount of profits. Finally he begins to pyramid too heavily and too fast near the top, with the result that when the trend turns he gets caught overloaded and loses all the profits he has made and probably a lot of his capital. Sad experience has taught me that it is better to be safe than sorry. In speculation let "safety first" be your motto. In trading, your first risk should be your greatest. Sup pose on your first trade you risk 5 points, which, if lost, comes out of your capital. We will assume that the stock moves 5 points in your favor. You can then buy a second lot and place a stop loss order 5 points away, and if it is caught, you will still be only loser 5 points, because you will be even on your first trade. Pyramiding all depends on where you get in on a stock, — whether near the bottom when a move starts upward or near the top when it starts downward. On active stocks, as a rule, it is safe to pyramid every 10 points up or down, but you should decrease your trades and never increase them. Suppose your first trade is 100 shares and the market advances 10 points; then you buy 50 shares and it advances 10 points more; you buy 30 shares and it advances 10 points more; you buy 20 shares and it advances 10 points more, and you buy 10 shares. After that every 10 points up you buy 10 shares more. In this way, if you follow up with a stop loss order, your profits will always increase while your risk will decrease. Your last trade may show a loss of 3 to 5 points according to how you get out on stop loss orders, but all of your other trades will show big profits. It is always safer to pyramid after a stock moves out of accumula tion or distribution zones. Learn to adhere strictly to a rule or do not follow it at all. One thing you must not overlook, that every time a stock moves in your favor 5 or 10 points, the chances against it moving further in your favor have decreased. This does not mean that the stock will not go a long way in your favor, but it is the percentage against you that must not be over looked. BUYING AND SELLING ON A SCALE Many investors and traders have the idea that the only successful way to trade is to buy or sell on a scale up or down. I have never yet seen a scale method that would beat the market. Some one asked Russell Sage if he believed in buy ing on a scale. He said that there were only three men who had money enough to buy on a scale, — Carnegie, Morgan and Rockefeller, and they had more sense than to do it. A scale method will not work for the reason that you add to your holdings when the market is going against you, thus increasing your risk. If the market is going against you on the first trade and it looks like you are in wrong, the thing to do is to get out quickly and not buy or sell more. The time to take additional risk is when the market is moving in your favor, as shown in my pyramiding plan. It is all right to buy or sell more if you are doing it when you are making profits, but when you are trying to average, with losses piling up against you, you are sure to make a serious mistake, which will sooner or later cost all of your capital. stock trading advice ~ foreign exchange currency trading |