What is pyramiding?

When you make profit on a commodity, you don't have to sell it for it to be worth money. It's added to your account automatically. Therefore, the profit you just made is available to purchase more of that commodity if you feel the market is gong to continue in your direction. This is actually called a upside down pyramid or reverse pyramid. Start with 1 contract, when you make money, buy another contract. When they both go up, you buy 2 more contracts etc,etc.

Spread Trading: Averaging Up

Pyramids are built by adding to your winners by stacking or pyramiding.

My teachers had just gone thru hours of instruction in the Why, How and Wherefores of diversification. I could clearly concede that you don't want to buy anything without two of something else to balance it. Then Mr. Kroll off handedly said something like. Of course, when you find one that is really moving, you have to go for it.

Then they proceeded to explain stacking, pyramiding and averaging up.

In our Spread Trading, we are experimenting with averaging up at the end of the week, when we hit a new high during the week. We are trading on new weekly highs in the Seasonal window.

Here is the logic. When we have a security rising steadily, on average we expect a little incremental increase daily. So if in a perfect world the effects of increasing supply effect contracts for delayed delivery differently. Then we would expect the trend to continue during the week and over the weekend, 24x7.

If this held true we would be closing on the high of the week and each week would close higher than the previous week.

All of us do not trade for the same time duration. Short-term traders have to be out at the end of the week so that they do not have to put margin at risk over the weekend. So, we tend to see the uptrend confirmed by a little profit taking on Fridays close. These traders were on the same side of the spread as we were, so liquidating causes Friday's close to move slightly counter-trend.

Our very purpose for being in this game is to harvest premiums for providing additional liquidly when it is needed.

First, we have the break out of the previous weeks high suggesting continued momentum in the direction of the seasonal trend.

Then we have the additional premium from off setting short-term traders, assuring us that we will not have to chase the market to be filled.

Third we have the built in market forces working in our favor for three days from when we get our fill on Friday to the next market close on Monday. Grain is still growing, the world's hunger still eating.

Combine this with the increasing equity from last week's position and you can see why we consider averaging up at the end of the week when we hit a new high during the week.

"When your security is acting right, you can safely add to your line from then forward!" Jesse Livermore

Another form of pyramiding: Take a power utility, create a half dozen subsidiaries. Each subsidiary then takes out "non recourse" loans and the assets are safely quarantined in the parent. Because debt/equity is high in the subsidiaries and because they have "stable cash flows" the banks queue up to lend them money. Expand overseas (South America is a favourite), create another half dozen subsidiaries under each & borrow billions more via "syndicated loans". Because of the 6:1 fan-out, debt/equity multiplies and hence ROE looks fantastic. Since loan salespeople have MBAs from the best business schools - they understand that ROE means "management effectiveness". They queue up to join the party. Pretty soon, you have a pyramid of non-recourse loan supported subsidiaries. If it works, you get all the profit. If it fails, the banks end up with the subsidiaries' equity in lieu of repayment. It's a great system - everyone wins ;-)