The Pyramid Rule of Position Management Methods, Applied to Foreign Exchange Platforms

Regular pyramid adding method

Whether it is stocks, futures orForex PlatformPyramid positioning is one of the strategies commonly used by trend traders when chasing gains.

The so-called pyramid adding method is simply the first investment of 50,000 yuan to buy a variety, the second investment of 40,000 yuan to add the same variety, and the third investment of 30,000 yuan, each investment amount is decreasing compared with the previous one. Because this method is mostly used to chase up, the price of adding positions is usually higher than the last time, and the number of purchases is correspondingly reduced, forming a pyramid shape with a large bottom and a small top.

The reason why investors use the pyramid method to chase up is mainly because the rise of any investment variety has its limits. Especially in a non-unilateral bull market, it is normal to have a correction after a moderate increase. In this trend, the probability of approaching the top area increases with each increase in the price, and the potential future increase will be narrowed accordingly. Based on this anticipation, gradually reducing the size of the increase will help reduce the risk in subsequent operations.

Suppose an investor has 100,000 yuan of funds and uses the same amount of chasing to buy 25,000 yuan at 5 yuan, 6 yuan, 7 yuan, and 8 yuan respectively, with an average cost of 6.5 yuan. If 8 yuan is the top, the stock price falls back to 7 yuan, and the return is about 7.7%. Instead, use the pyramid method to add positions and invest 40,000, 30,000, 20,000 and 10,000 yuan at the same price, the average cost drops to 6 yuan, and the return can rise to 16.7%.

Inverted pyramid adding method

Some people like to chase the rise, while others prefer bottom fishing. For value investors, the lower the quality of the target, the more worth buying in batches.

For varieties in a downward trend, the inverted pyramid method has more practical value than the pyramid method. The operation mode of the inverted pyramid method is to gradually increase the number of each position.

In a volatile market, the decline cannot be endless. Each decline means that the probability of continuing to decline is decreasing. Therefore, the number of additional positions can be gradually increased, so that the amount of additional positions can be matched with the decreasing risk. As for the specific advantages of the inverted pyramid method, the reader may wish to reverse the above example and compare it with the equal investment method.

The rule of the pyramid is to pick the right person

The pyramid method and the inverted pyramid method have their own applicable scenarios, but in practical applications, the investment object must be carefully selected - especially the inverted pyramid method, which emphasizes that the more you fall, the more you buy, and cannot be used blindly. For foreign exchange platform traders, this is particularly important. There have been some blue-chip stocks whose share price was as high as more than 40 yuan, but later fell to 2 yuan or even 3 yuan due to financial fraud. Similar situations are not uncommon in the market. If the inverted pyramid method is still used at this time, it will only cause greater losses. The premise of using the inverted pyramid method is that the investment object has the possibility of bottoming out or even reversing, and it needs to be fully confident in its fundamentals when used in stocks.