I do love this sell off indeed. However my greedy side desires more! More selling so I can have more buying. It is interesting how Pyramid Investing concept alters one’s mindset regarding the price. Can you imagine long investors who sincerely desire lower prices? How perverted. Yet totally true. We are so confident that eventually price will get much higher that the expectation of such outcome gets completely pushed in the background. So we operate in present and what matters here and now is to accumulate more. The only way for that to happen is if price goes down. Thus the focus on dropping prices and desire to be able to acquire position additions cheaper.

I was a little disappointed when gold and silver stocks didn’t express much weakness while bullion was sinking. I expected some amplification of gold’s downside move to be reflected in stocks but that didn’t happen for most of ones I trade. Well, better luck next time. I hope this was NOT the bottom. On the other hand, if it was, I can’t complain – I am in excellent standing for parabolic move in gold price.

I appreciate testimony of your former market practices. I think there is still great majority who trade the same way you described. And what is even worse, they go through the same agony over and over again, emotionally and mentally while their accounts absorb endless losses. Unfortunately, I can only do so much to promote Pyramid Investing but the task pretty much lays on others to find out about this blog and seriously ponder the benefits this approach offers.

Trading by pyramid has been a revelation, my friend. There was a time when I would be trying to spot market turns using technical analysis. Lord was that stressful – hours spent hunched over charts calculating stops and risk factors, then days spent worrying about whether the market would turn against me and stop me out – it was like death by a thousand small cuts.

Now, I look at the market for a few minutes each day, and I could care less about where it goes. I welcome market weakness with both hands, I even wish it to go lower so that I can get more invested.

I feel like I’ve been set free.

One of my favorite rewards from this blog is when I get a response from people who understand what Pyramid Investing is all about and how powerful the concept is. I appreciate your support and understanding. I find it interesting that you are a Mechanical Engineer. I guess engineers do think alike when it comes to investing…

I looked at your Vortex investment program web site. I still haven’t learned Dutch so the level of information I was able to get was limited. However, I did see that you use some more sophisticated mathematical analysis in your approach. In my case, I try to stay away from hardcore mathematics so not to defer potential interested investors if nothing else.

I also believe in simplicity being a core of profitable investing. Any optimization is fine but has to be optional. Basic model has to provide for decent profitability on its own. I like to refer to Pyramid Investing as “a game of small round numbers”.

One aspect I definitely lack of is software platform for trading. Currently I operate with a help of Excel spreadsheets and I enter my orders manually. A Pyramid Investing software that would be capable of talking to my broker’s trading platform would certainly be of a great help. On the other hand, the amount of capital I currently manage does not require automation of the process.

Well, this is interesting! In my previous remark I identified that this Pyramid Investing was a contrarian method: periodically buying on low prices and selling on high prices. . and indeed the explanations at the top of the page prove that Pyramid Investing is exactly that (price driven trading).

Congratulations Sasa.

As I mentioned, this generic contrarian investment method is not new. Various forms of it exist, each specific variant having its own trading guidelines as to at which moment to buy low and to sell high (The Golden Rule of Investing) that most amateur investors ignore. . .but the professionals use this method consistently (like the examples mentioned here how banks manage their investment portfolios): when prices rise they increase their liquid assets and when prices drop they expand their equity positions. . .being careful to avoid “obviously” dying dogs and to invest only in “reliable stocks”.

The AIM Method, from which I have developed my Vortex Method and TurboVest Method work generically the same way as Pyramid Investing. In the execution various overlay structures can be added to optimize the trading (algorithms, filters, market know-how etc). The more one knows about the market and its dynamics the more profit one can make. In this sense my TurboVest Method, a buying technique using asset based resources. . .it is an accelerated investment method for dropping prices. . . .is intended for aggressive investors with a stuffed wallet!

I am glad I am in good company! Pyramid Investing is not my competition. . .you and I are underwriting the same sensible & logical way to Buy Low and Sell High!

I admire your marketing skills for this investment method!

I wish success for you with your book.

Regards,
Conrad

Obviously, the banks have powerful computers to calculate pyramids based on algorithms and average true range etc, but the principle is the same. They buy into weakness and sell into strength. And investment banks are not in the habit of losing money.

I consider Pyramid Investing too simple to qualify as algorithmic trading. However, I agree with your observation that banks make use of powerful computers. Computers can certainly allow them to calculate optimum pyramid parameters in realtime. Another thing, they are capable of automating their trading which is crucial during highly volatile sessions especially when they run pyramids with minuscule step sizes. I calculate my pyramids with a help of Excel and I operate my trading manually. It works fine 99.9% of the time but I can see where my limitations are.

It is interesting to note that Pyramid Investing actions have stabilizing effects to the markets. Pyramid Investing trades provide support in down-trending markets and resistance to up-trending markets. On the other hand, algorithmic trades that Institutional players apply have destabilizing effects since those tend to amplify market moves in either direction (in other words “price chasing” actions; in engineering, this is called positive feedback). Actually, that is not surprising at all since Banks are (among other things) in business of writing and selling those algorithmic trading packages to Institutional players so they can take the other side of their trades.

Couple days ago when DOW sunk 1,000 points in a matter of minutes, there was a total breakdown in number of stocks that were traded by algorithms instead of humans, where Bankers didn’t show up to take the other side of the trade. That only serves as a proof of pity nature of trading that Institutional players perform. On the other hand, it signifies the value of Bankers in stabilizing the markets. Most of the stocks I have pyramids on barely even dipped during the whole ordeal. That gives me confidence that I am dealing with quality stocks where I have to compete with Bankers to get them cheap.

But what really cemented my confidence in the system was when I read an article on trading gold, where the author spoke of how the banks trade commodities. He explained how the banks would be taking on more contracts as price declined and then selling as price increased.

Finally, I think I have a nice reply to your comment. Your mention of banks trading commodities prompted me to write a whole article on the true role of Banks in the world of investing and transfer of wealth (towards them). The article True Market Players and Wealth Transfer is somewhat controversial but I deeply believe it is true. It is also in agreement with statement that Banks never take actions in the market in order to lose money. We may or may not like bankers, but if we are to consistently profit from our investment efforts, the only solution is to imitate their actions. Pyramid Investing is really a concept that allows for systematic approach to investing in a “bankster” style.

Why? Because I had sold my positions all the way up the recent rally, netting a nice 1% profit. Then I waited for weakness, which was quite frustrating as the market kept going higher. But I kept my discipline and sat patiently.

Now, I am buying into this weakness and enjoying the knowledge that I am trading with the smart money. Buy weakness, sell strength.

I’m not saying that it is easy, as all the same psychological issues exist around discipline and overcoming greed and fear. But now I don’t care which way the market goes, as I have a plan for it and as long as I stick to that plan, I will be ok.

I have one pyramid which is in drawdown at the moment, as I have been building a position in Natural Gas. Before, I would have been feeling really bad and tempted to just sell out and take the hit. But now I have no worries and don’t mind if it goes lower, as that just means better prices. I don’t need the money as it is in my pension, so I have 20 years to wait for this pyramid to run its course.

I gotta say that pyramid investing is a revelation Sasa. It has taken all the anxiety out of trading the market.

Regards,
Simon

Pyramids are to help us reduce the amount of decisions. Many traders are way too influenced by their own feelings and different urges. Without help of Pyramid Investing or some similar concept, they are unable to profitably operate in the investment world. On the other hand, some possess talents to trade profitably without any specific concept. Those traders are extremely rare.

So we need to be honest to ourselves where we fall on the scale of trading capabilities and talents. There is nothing wrong in digressing from the concept here and there as long as those actions do not produce losses. I never digress from my trading pyramids, but to satisfy my urges of greed, I acquire core positions in a flexible and discretionary way. Although my core buying decisions do not follow any specific pattern, they roughly DO happen in a pyramidal way.

My favorite core acquiring technique involves buying stocks that I deem oversold (with help of Relative Strength Index – RSI). I do not call the bottom. I look for oversold conditions before I even start my core acquiring campaign. Then I look forward to continued weakness. This works very well to me.

Thus I buy core before I make a profit on a trading position, meaning I employ more capital upfront (during severe weakness). Eventually, I end up with core positions paid off (after I sell out my trading pyramid). My approach is somewhat similar to your example with the main difference being that I designate core purchases as such at the time I buy them. I find this approach simpler to handle and I also keep core and trading shares separate. I like your game with different numbers of shares and having leftover shares at the end though.

One of the ways to acquire core is to have only one pyramid, but to split purchases at each level into two or three portions. One portion is always regular trading portion. One portion is always core portion. If there is a third portion, then it is trading portion with delayed selling (larger offset). Actual percentages of portion split are arbitrarily determined, with fifty-fifty or thirds being the most common. I never found this approach appealing since I didn’t like the idea of core positions being acquired in any regulated manner. I also do not agree with core positions being acquired close to the top of trading pyramid.

As far as trading gold related stocks and plan to sell core before next bear market begins, I would like to comment: It is too early now to think about whether this is the top and whether the bear market can start any day now. There is so much trouble out there in the financial world that precious metals will be in a bull market for another decade easily. Thus there is no worry for me that I will miss selling my core. If we get a gold price smack down at any time in next few years, you can bet I will be on a buying side. I will be in gold accumulating mode for years to come, thus I will allow myself to remain without core selling plan.

Would like to get your thoughts on something I have been playing around with recently.

I notice above that you talk about having a core position in Gold alongside your pyramid trades. I have been playing around with pyramids with a view to trading the volatility in order to build a core position: rather than take profits out, we leave them running as free stock.

So for example, we buy $500 worth of stock down through the levels, then sell $500 of stock up through the levels until we reach the top. But instead of selling all our stock at the top of the pyramid, we sell $500 worth and keep the rest as free stock.

For example:

Level……..Price………..Buy………Shares………Sell………Shares
…0……….$1.00……………………………………..$500……….500
…1……….$0.95……….$500……….526……….$500……….526
…2……….$0.90……….$500……….556……….$500……….556
…3……….$0.85……….$500……….588……….$500……….588
…4……….$0.80……….$500……….625

So we buy 2295 shares on the way down and sell 2170 on the way up. This effectively gives us 125 shares left that are cost free and can be sold at anytime for a profit.

I see the benefits of this in a bull market: You still get the low risk benefits of pyramid investing but now you are building a core position and letting your profits run.

Of course, this does introduce an element of discretionary trading, as you will need a plan for selling your core position at some point before the next bear market.

Look forward to hearing your thoughts on this Sasa.

Regards,
Simon

To be honest Sasa, I thought that myself at first. And so I played around with building pyramids for different equities and commodities over different timescales and with different depths and price levels. I tested the system over and over and I could not find a way to lose money. The only risk is that price goes to zero and never comes back, eg Enron.

I even tested pyramids on housing stocks which lost 95% of their value in the bear market. They are still 60% off their highs, but the pyramid has traded out of drawdown and is now in profit.

But what really cemented my confidence in the system was when I read an article on trading gold, where the author spoke of how the banks trade commodities. He explained how the banks would be taking on more contracts as price declined and then selling as price increased.

Obviously, the banks have powerful computers to calculate pyramids based on algorithms and average true range etc, but the principle is the same. They buy into weakness and sell into strength. And investment banks are not in the habit of losing money.