First, let’s analyze your pyramid. You can also see the line of my thinking during the process of shaping pyramids. All parameters can be inferred from the example you gave above, i.e.:
1) Top = $19
2) Step = $2
3) Base = 100sh
4) Increment = 25sh
5) Offset = 0

Top is $19, which is Depth = 0. First buy occurs at Depth =1 or $17. This is all fine.

Your Step is $2, which is little more than 10% of the Top. While theoretically there is nothing wrong with 10% Step, it is practically little large. Depending what you are trading, Step should be between 1% and 5%. 1% would correspond to stable and not much volatile instruments (bullion for example). 5% would correspond to very volatile stocks (gold juniors for example). Of course, there is no right or wrong step size. This is all eyeballing, and you normally develop a good feel after trading few different instruments over some time. Too large of a step makes very slow trading. It may be months between two trades. However, profits are great. You may miss a lot of small ups and downs. Depending on your temperament and desire not to be involved in the market very often, 10% step may be just fine.

Base of 100sh means you will trade $1,000 – $2,000 at a time. That is a decent chunk that may tolerate higher commissions. Commissions are realistic factor that usually prohibit profitable trading of very small chunks (let’s say $10 or less).

Increment of $25 is good (quarter of your Base). That makes for nice pyramid that is probably in the golden middle between aggressive skyscraper and a conservative, wide pyramid.

The article above doesn’t address Offset. Offset of zero is a school example. In real world, better efficiency is achieved with Offset of one or two. That means you delay selling and skip one or two steps. It also holds for subsequent delay in buying.

Very important thing that you need to understand is that price may NOT bottom at $15. You certainly don’t want to stop buying if price craters to $10 or $5. In other words, pay attention to the cost of your pyramid. In your case, it is $13,200 all the way to zero (actually $1). You need to have as much capital set aside in one way or another before you commit to trading this pyramid. That is the big picture. You don’t want to be guessing where the bottom may be. You have to be prepared for every possibility. That includes the possibility of losing all your $13,200, should the stock goes bankrupt. At least the ultimate loss is limited.

Thanks for your time so far.

I think you are on the right track with your analysis. You are hitting some very important aspects of Pyramid Investing and your observations are correct.

Your focus is on the amount of dollars committed to certain price levels. Although, there is nothing wrong with that approach, for the sake of simplicity I focus on number of shares. As a consequence the analysis becomes linear and easy to discretize. Your approach involves dealing with exponential functions. Bottom line is that either approach is similarly profitable.

Major obstacle for most of us to properly act in the market is EXPECTATION of price movement (let alone some investor’s “knowledge”). It is very hard, but one needs to accept inability to know in what direction and how much price will move. After you accept you don’t really know anything about future price moves, you are ready to shape your pyramids properly. It is good idea to have differently shaped pyramids designed to capture different price moves. This helps balance your emotions and prevents you from acting irrationally in the market. Being bullish or bearish has little to do with the shape of pyramids – it has a lot to do with determining the top of the pyramids: bullish equals higher top, bearish equals lower top. Bottom is always at zero.

As far as the shape goes, it is determined by base and increment. Larger base and smaller increment makes more aggressive approach suitable for shallow oscillations. Smaller base and especially larger increment make conservative, long-term pyramids that are to capture large price swings. Those pyramids are very very profitable.

I have been playing around with different widths of levels and would be interested in your thoughts on this.

You have talked already about how the width of the levels increases as you buy more shares per $ the further down the pyramid price goes. So let’s say I have $10k and 10 depths, then I invest 10% ($1k) at each level but get more shares each time.

But let’s say I use a different scale and invest a bigger proportion of my capital at each level, for example:

Depth 1 – 5%
Depth 2 – 5%
Depth 3 – 8%
Depth 4 – 8%
Depth 5 – 10%
Depth 6 – 10%
Depth 7 – 12%
Depth 8 – 12%
Depth 9 – 15%
Depth 10 – 15%

So this way the width of each level gets wider in both shares and dollar terms. When I test this, it brings much bigger profits, but only when price goes down to the lower levels. And of course there is no guarantee that this will happen.

I think this system would be better used in a bear market, as it limits the drawdown at the top of the pyramid and gets more capital invested at the bottom, which a bear market is likely to reach. But in a bull market, it is unlikely to go down more than 3-4 levels so it would be better to go with the original system of investing the same proportion of capital on each level (or perhaps scaling your capital the other way round?).

You did say that there were different ways to shape the pyramid depending on how bullish or bearish you are, so I will be interested to see how you have done that.

Idea of Pyramid Investing is not new. However, I am not aware of any resource that explains into any great detail how to go about Pyramid Investing. I have myself meticulously developed every aspect of Pyramid Investing concept except the idea itself. I worked it out from scratch and now I have well-rounded package that I apply in my own account. I am proud of the concept and I am open to share every single detail about it through this blog. There is only one caveat – as a reader of this blog, you will need patience while I post articles at my own pace. Patience is a crucial trait of every serious pyramid investor so I don’t expect that to be a problem.

Trading yourself out of drawdown, as you put it, is an excellent observation and highly applicable to Pyramid Investing. Pyramid Investing makes profits thanks to volatility. At the same time, those profits reduce your position average cost. The objective is to reduce the average cost to zero, at which time you would be solely dealing with “market’s money”. Prolonged volatility around some lower level of your pyramid would eventually bring your average cost down to that level and you would be having no drawdown anymore. The amount of time needed for that to happen depends on frequency and magnitude of volatility as well as the depth the volatility occurs around. We have no control of any of these factors. However, proper pyramid shaping can increase profits and mitigate the wait.

I advocate applying exclusively pyramids that go to zero. At the moment you make your first pyramidal buy, you should have enough cash to cover the whole pyramid. That is the ultimate low risk approach you can take. Then you have peace of mind that no amount of weakness would come as a surprise. There is some price to be paid for such an approach on the reward side, but the whole point is to stay in the game regardless of price making possible or impossible moves.

Basing your pyramids on gold and certain commodities alleviates the risk of underlying vehicle going off the board. So you can robotically execute your pyramids thru any and all meltdowns with a smile on your face as opposed to being forced to liquidate in terror.

As far as backtesting, I have some rather primitive but very straightforward ways to show the profitability of pyramids for different scenarios. I think this is yet another great advantage of Pyramid Investing that it doesn’t require sophisticated algorithms executed on historical data to prove the viability of the concept, although such an approach certainly wouldn’t hurt especially for unbelieving Thomases.

What I meant (but didn’t explain very well) was trading yourself out of drawdown, rather than your position.

Say for example you have 20 Depths, you buy down through 15 of them. At the moment you are facing quite a big drawdown. Then price rises and falls but never goes higher than say Depth 5. You are not out of your position, but the more you buy and sell across the various lower depths, the lower your overall average price will become. So eventually you would show a profit without the pyramid ever completing.

In this way, pyramiding becomes relatively risk-free as long as you have the capital to cover all the depths and the time to allow volatility to bring down your average price.

The only risk is for the price to go to zero, or you run out of time.

I am very excited by what you have shown me, and am backtesting the basic principles that you have shown so far.

I appreciate that you are doing this for free and that it takes a lot of effort, but I have so many questions. Is there anywhere I can get more information, as I do not want to take up all your time with my questions?

Many thanks.

• - Each time you buy, you actually bet that the price will rise and similarly
• - Each time you sell, you bet that the price will fall.

When you sell something you previously bought, it means you won the bet. The profit realized is your reward for winning the bet. By selling, you actually bet at the same time that the price will fall. If it falls, your reward is that you didn’t lose anything since you haven’t been invested during that price drop.

There is a general truth that the lower the price, the higher the probability it is going to rise. In other words, the lower the price, the less chance it will drop further more. We exploit this fact by increasing our bets as the price goes down. Therefore, we buy in a pyramidal way. Similar holds for selling except the logic is inverted. But we also sell in a pyramidal way.

Capital you dedicate to Pyramid Investing is not only divided into number of different pyramids, each pyramid divides it further into number of chunks of different sizes. Since nobody knows where the price will go and we don’t even want to speculate on that topic, we simply place small chunks of our capital at different price levels. Each chunk is our bet.

By definition, we have many chunks and once we place a bet, we don’t touch it until it wins. Pyramid Investing is transparent to time. We win when the price reaches certain level. That may happen shortly after we placed the bet or many years later. It is important that whenever you place a bet with a certain chunk of money, you accept that it may take forever before it wins. I am sure you would be pleasantly surprised how many of your bets win quicker than expected. However some get stuck. If you are not comfortable with every single bet you place for it to get stuck, it means you are placing too big of a bets.

Therefore, you are not going to trade your way out of position before the top of the pyramid has been reached. If you think that is unlikely, you need to start lower. If you don’t want to involve any thinking, that is why you buy in a pyramidal way. Pyramids have many wonderful features and I will be discussing those in due course of time. There are ways to handle different stocks and markets. You can shape pyramids based on how bullish or bearish you are. You can be a successful player regardless of the market you are in.