Commodity Pyramid Trading is a process in which profit generated is used from existing positions for acquiring additional positions. It is a method in commodity futures contracts are traded in such a manner that when profits from single trade equal the current margin for the commodities, the profits are used for self-financing additional futures contracts. This process of self-financing can take any of the two methods: Pyramid Trading or Pillar Trading.
In the Pyramid trading method, one futures contract is added to your position, but from every active contract with every self financing step. Because of this, your position is doubled with each self financing step. Pyramid trades should exhibit a few characteristics which will make them highly profitable potential candidates. Some of these characteristics are:
- The market should be quiet and should have exhibited low volatility for few months.
- The commodity margin should be relatively low.
- The market should be set up for some major move. This can be easily evidenced by extreme public or commercial signal, and also a 12 months high or low on daily price chart with 1-2-3 Bottom or Top price chart pattern in the unfolding process.
While using the technique of commodity pyramid trading, you should do several things, failing which, you will undoubtedly invite grief to your life. First of all, it is extremely important to perform a thorough market analysis for identifying ideal pyramid trading opportunities. After that, you should have commitment and patience to wait until an inevitable move in the price takes place. Have trust in your skills and you will surely become an ultimate winner.
In order to avoid switching contracts, make sure that you are getting into distant futures contracts only. It is also important to monitor your trades position everyday. In this way, you will stay aware of what analysis tools tell you about the present state of the market. Keep your eyes and ears open to any news items that would positively or negatively affect the commodity that you are trading.
A move in the price usually results in several minor retrenchments, leaving resistance point when price decreases and support point when price increases. With this strategy, you will be able to place stop-loss below the support point and above the resistance point. Timing of order entries is also crucial. You have to predefine what your strategy will be to enter during each of the phases of commodity pyramid trading.