Before we get to the BPC let’s review a standard Swing Low setup on the Spiders:
As you can see the Spiders closed at 128.37, so let’s assume that you went long at 128. Now you have to set a stop and if you you’re a trend trader then you also need to define your pyramid scheme. Your first and foremost concern of course is your stop and there a various ways of how to set that. May traders would set it a tick below the prior low – which would be 127.13. So a stop at 127 seems like a good idea.
I however prefer a multiple of average true range (ATR) to define my stop. Simple reason for that is that I don’t want intra-day swings to touch my stop just and watch the the bus leave without me a day later. Of course short of a crystal ball it’s impossible to know how wide she’ll swing but ATR serves as a reasonable protection. Some folks use a 0.5 of their N multiple during the entry day and then expand it to 1.0 N thereafter – not a big issue for me as I buy late anyway. N defines your max risk per position and should not exceed more than 1% of your entire assets. So, if you have $100k in your trading account you should not risk more than $1k on each position. In this particular case, if your stop is 2.0 N away that means that you will lose ~$2.20 per SPY share. Divide that by 1000 and you can buy 454 SPY shares at $128.-.
Here’s the example in the TOS simulator. I have set the $2.2 (i.e. 2 x $1.1) stop at 126.17 as well as the first pyramid point which is at 130.57. As you can see – if your 2N stop gets hit you will lose roughly $1000.- and that’s 1% of your assets. If you trade options the calculations change a little bit and I leave that in your capable hands.
Now trend traders often pyramid their positions, so that means that once a trade is going in your favor you add another ‘unit’. Again, I do that by using a multiple of my risk exposure, which in turn was defined by ATR. You can of course use an arbitrary stop in which case you use multiples of whatever your entry/stop delta comes out to. Some trend traders add up to three or four units and you should really count your blessings at five units. As you can imagine calculating this entire scheme gets rather complicated quickly and use up a lot of your trading time. And that brings me to your new favorite toy: Bernie’s Pyramid Calculator (BPC) – a trading tool exclusive to Evil Speculator subscribers:
I have set the entry price here to 128, just like in the setup in my first chart. Not to beat a dead horse, but in order to use this tool you need to first figure out how much you want to lose on each position. And I phrase this intentionally that way – when I enter into a position my base assumption always always is that I am wrong. That affords me the luxury of staying cool when my stop gets hit and to be happy when I wound up being right. When it comes to calculating your risk my tip would be define your risk exposure in the BPC first and then to use to TOS simulator to calculate how many shares or options you can buy/sell based on your 1% risk rule. If you use a 1N stop you can obviously get into more positions than with a 2N rule – this is all up to you and maybe I will cover this topic another time. I know it all sounds horribly complicated but once you’ve done it once or twice it’ll become second nature.
Now, the first thing you do is to add the symbol for posterity’s sake- the script automatically puts it into upper case. Then you enter the ask price and if you want you can also name the trading system use for this position (always helpful a week later if you’re suffering from ADHD). Next you use the daily ATR of the particular symbol to define your stop – I usually use a 14-day ATR – but 10 is fine in more volatile times. The rest happens automagically – you immediately know your first stop without having to resort to complex trigonometry and even your entry day stop at 0.5 x whatever your N is, if that’s part of your system. Even better – you also get your future pyramid triggers and you can add those as timed entries (price trigger and time) in ThinkOrSwim.
When I take a position like this I usually also use jing to produce a screen grab of my trade. That’s why I also added the date and time on top of the BPC, it tells me exactly when the trade was taken. You can either print it out or add it to your private trading blog – I personally prefer latter. What happens next is up to the tape. Either you get stopped out and you’re done, or the tape moves in your favor and that means you have some work to do. You can either trade each additional unit manually or do it via triggers in TOS – there are pros and cons to either. I like to do it manually as I also consider the velocity and ‘feel’ of the tape – but if I’m honest I need to concede that I often slept through adding additional units.
And there you have it. Pyramid trend trading made easy – even for the mathematically challenged. If you look at the SPY chart above you see that the 1N stop used in the example came out to just where we would want it – below the 127.13 prior low at 126.9. I prefer that to 127 as integers often get hit in stop sweeps. Even when I take discretionary trades I prefer to set my stop at non integers.
Again, the tool is exclusive to subscribers and I hope that you will find it to be a welcome tool in your trend trading arsenal.