Pyramiding versus opening new position

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mmtrader
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Pyramiding versus opening new position

Post by mmtrader » Thu May 12, 2011 2:17 pm

Is there any material difference between pyramiding (ie adding to an existing position that has gone in your favour) and opening a new position in another market as your first position has gone in your favour?

For example :

Pyramiding - risk 1% of account on Bund - stop at 100.00, entry at 101.00. Price moves to 103.00, stop moves to 102.00. Therefore, in theory, you have locked in 1.00 or 1%. Risk another one percent of account on Bund, stop at 102.00, entry at 103.00. Two positions in same product. If price moves to 102.00, then exit at breakeven.

Opening new position in another market - risk 1% of account on Bund - stop at 100.00, entry at 101.00. Price moves to 103.00, stop moves to 102.00. Therefore, in theory, you have locked in 1.00 or 1%. Risk another one percent of account in Eurostoxx - stop at 3000, entry at 3100. Two positions in different products. If Bund moves to 102.00 then exit that market with a 1% profit, but if at the same time Eurostoxx falls to 3000, then exit that market with a 1% loss. Therefore, result is also breakeven.

I guess I am assuming away any correlation differences - let's just assume that risk is risk and all markets are perfectly correlated to each other.

So, in that case, is there any difference?

sluggo
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Post by sluggo » Thu May 12, 2011 3:07 pm

Here is one way you might imagine exploring your idea in simulation. On the left: pyramiding a la Turtles. On the right, no pyramiding.

You could run the simulations to see whether the two systems perform differently. If so, which one do you prefer?
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