Position Management Method: The Pyramid Rule

Regular pyramid adding method

Whether it is stocks, futures or foreign exchange, the pyramid method is the most common method used by trend traders when "chasing up".

The so-called "pyramid adding method", with a simple example, is to invest 50,000 yuan to buy a variety for the first time, the second time to invest 40,000 yuan to buy the same variety, and the third time to invest 30,000 yuan to buy another variety, each time the amount of investment is less than the last time. Since this method is mostly used for "chasing up", the price of each adding position is higher than the last time, and the number of purchases is also less than the last time. It is drawn like a pyramid with a large bottom and a small top.

Why do many investors use the "pyramid adding method" to chase the rise? Generally speaking, any investment variety cannot rise indefinitely, especially in a bull market that is no longer unilateral. After a moderate increase, a moderate adjustment is extremely normal. In such a trend, every time the price rises, it is thought that the probability of approaching the top increases, which also means that the potential increase in the future is reduced. Under such estimates, reducing the scale of subsequent increases can help reduce the risk of subsequent increases.

If an investor has 100,000 yuan of funds, according to the equivalent chasing method, the stock is 5 yuan, 6 yuan, 7 yuan, 8 yuan each to buy 25,000 yuan, the average cost is 6.5 yuan, and then the trend proves that 8 yuan is the top, the stock price returns to 7 yuan again, and its return is 7.7%. But if you use the pyramid method to chase up, buy 40,000, 30,000, 20,000 and 10,000 yuan at 5 yuan, 6 yuan, 7 yuan, and 8 yuan respectively, then the average cost is 6 yuan, and the yield can be increased to 16.7%.

Inverted pyramid method

Some people love to chase up, some people love bottom fishing. Especially value investors, who tend to buy good stocks as they fall.

For stocks that are falling, the inverted pyramid method is undoubtedly more valuable than the pyramid method. The so-called inverted pyramid method means that each time you add more positions than the last time.

After all, in a volatile market, the decline cannot be unlimited. Each decline means that the possibility of continued decline is decreasing. Therefore, the number of additional positions should be gradually increased to ensure that the amount of additional positions increases as the probability of decline decreases. As for the benefits of the inverted pyramid method, readers may wish to reverse the above example and compare it with the equivalent investment method.

The rule of the pyramid is to pick the right person

The pyramid method and the inverted pyramid method have their own advantages and disadvantages, but in practical application, we must pay attention to the investment object - especially the inverted pyramid method, which emphasizes that the more you fall, the more you buy, and cannot be used easily. The former blue-chip stock, with a stock price of more than 40 yuan, was finally found to have falsified profits, and finally fell to only 2 yuan or even 3 yuan. This example has often been encountered in the past. If you use the inverted pyramid method at this time, you will only die worse. In fact, to use the inverted pyramid method, first of all, the investment object must have the possibility of bottoming out or even reversing. If it is used in stocks, you must have strong confidence in its fundamentals.