Cash from pyramids

...cont'd from yesterday...

One good way to buy without using money is to use accrued profits on a winning position to amplify profits by pyramiding.

A psychologist who has studied hundreds of successful and unsuccessful traders reports observing three types of pyramiding used by the successful group. See Peak Performance For Investors and Traders by Van K. Tharp.

Type one pyramiding involves adding half of the prior additional quantity of the instrument traded on each occasion that you add positions using accrued profits to meet margin requirements for them. For example, first you buy 12 contracts, then you buy 6 (half of the prior quantity of 12), then 3 (half of the prior quantity of 6) and then 1 (half of the prior quantity of 3, rounded down).

Type two pyramiding involves adding half of the total existing position for the instrument traded on each such occasion. For example, first you short sell 12 contracts, then you short sell 6 (which is half of 12) resulting in a total of 12 + 6 = 18 contracts, then you short sell 9 (half of 18) resulting in 12 + 6 + 9 = 27 contracts total, and then 13 (half of 27, rounded down) resulting in 12 + 6 + 9 + 13 = 40 contracts.

Type three pyramiding involves adding equal amounts of the instrument traded on each such occasion. For example, first you buy 5 contracts, then you buy another 5, and finally buy another 5.

...cont'd tomorrow...

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