Introduction to Commodity Pyramid Trading

Introduction to Commodity Pyramid Trading




This article discusses the how to to profit from commodity pyramid trading.

These meaningful points will help you learn this technique:

What is Commodity Pyramid Trading? Commodity Pillar Trading Comparison Commodity Pyramid Trading Comparison Commodity Pyramid Trading Useful Tips

1. What is Commodity Pyramid Trading?

This is a method of trading commodity futures contracts in such a way that when the profit from a single trade equals the current margin for the commodity, the profit is used to self-finance an additional futures contract. This self-financing course of action can take either of two methods: Pillar trading or Pyramid trading.

The Pillar trading method involves adding one futures contract to your position during each self-finance round, while Pyramid trading adds one futures contract – but from each active futures contract with each self-financing step. This results in a doubling of your position during each self-financing step.

Both pyramid trades and pillar trades (hereinafter referred to as pyramid trades) should characterize several characteristics which make them high profit possible candidates. These characteristics include:

The market is quiet and has exhibited low volatility for several months. The margin for the commodity is comparatively low. The market is set up for a major move. This is evidenced by extreme commercial/public signal, in addition as a 12-month high or 12-month low on the daily price chart with a likely 1-2-3 Top or Bottom price chart pattern in the time of action of unfolding.

A VERY IMPORTANT observe: The biggest danger in any futures trade is a limit move which goes against your position. With a single futures contract, this is risky enough. With multiple futures contracts, this risk is seriously compounded. However, if you monitor the market conditions (both technical and basic market conditions) and the financial news on a daily basis, you will generally receive a timely warning of an impending limit move which may go against your position – giving you time to close out your position before that occurs.

The Pyramid Trading Form

The Pyramid Trading Form is at the heart of helping you to successfully implement and manage these trading strategies. It contains areas that will let you monitor and track up to three commodities using this trading strategy. Each area allows for up to 7 futures contracts to be held in the pillar trade position, and up to 64 futures contracts in the pyramid trade position.

How To clarify A Good Pyramid Trade Candidate

At any point in time, there will be several commodities with differing degrees of profit possible. However, it is important that you clarify the commodity which has the best chance of being a profitable pyramid trade. This method that you must perform a current examination of all commodities to clarify the commodity that meets the following requirements.

a. You must first use the Commercial/Public selection tools to clarify the commodities that appear to be ready to make a major move.

b. Of these commodities, clarify those that appear to be making either a 1-2-3 Top or 1-2-3 Bottom in the daily price chart. Calculate the daily 50% retracement target for each one. Also calculate the dollar amount the move represents.

c. Where applicable, use the weekly chart to calculate the weekly 50% retracement target for each commodity. Again, calculate the dollar amount the move represents if the weekly target is attained.

d. clarify the margin requirement for each commodity. The ideal pyramid trade will be one with a comparatively small margin requirement and with a dollar amount profit possible that is at the minimum three times the margin requirement for the commodity.

e. The commodity that you select must be a quiet commodity – that is, one which does not have wild price swings.

f. The commodity you ultimately select as the best pyramid trade candidate must also have enough time to allow the move to unfold. This method you need to get into a more distant month to minimize loss from commission switch requirements (which can be expensive with 16 or more contracts in your position). Select the more distant commodity contract month that has 120-180 days obtainable until the Last Trading Day (LTD).

g. The commodity which you have chosen must have a daily quantity of at the minimum 10,000 contracts for adequate liquidity. Open interest should also be 10,000 or more.

It’s important to remember that once you are in a trade, you must religiously perform an examination on a daily basis so as to clarify any changes in the original examination that may adversely impact your trade. In addition, you should always monitor basic “news” which will affect the price of the commodity. For example, if you’re short Orange Juice – and Florida has a freeze warning – close your position fast!

2. Commodity Pillar Trading Comparison

The commodity pillar trading strategy is the least risky of the two strategies because you only acquire one contract with each applicable price (profit) increase.

An example pillar trade resulted in $12,650 profit (before commissions). During the trade, your total risk was confined to $400 or less. If you had traded only one futures contract (with a 93.79 entry price, and a 94.92 exit price), your gross profit would have been $2,825. The pillar trading strategy produced the additional profit.

3. Commodity Pyramid Trading Comparison

The commodity pyramid trading strategy is the most risky of the two strategies because you acquire two contracts with each applicable price (profit) increase. This results in a risky “inverted pyramid” position which, if not intelligently managed can produce meaningful losses.

An example Pyramid Trade resulted in $72,200 profit (before commissions). During the trade your total risk was confined to $4,600 or less. Again, if you had traded only one futures contract, your gross profit would have been $2,825. The pyramid trading strategy produced the additional profit.

4. Commodity Pyramid Trading Useful Tips

There are several things which you must do when using the commodity pyramid trading technique described in this course. Failure to do so will likely invite grief into your life.

* You must perform an examination of the markets to clarify an ideal pyramid trading opportunity. Having done that, you need patience and commitment to wait for the unavoidable move in price. Your past efforts at paper trading have given you the confidence and skills to clarify major moves. Trust your skills.

* Get into the more distant futures contract to avoid the need to “switch” contracts. The commission on 64 contracts at $40 per contract will cost you an additional $2,560 in commissions each time you switch.

* You must monitor your position daily. This involves being aware of what the examination “tools” (described in my complete Commodity FUTURES Trading Course) are telling you about the current state of the market.

* Be aware of any “news” items which would have an impact (positive or negative) on the commodity you are trading. For example, if you are short in Orange Juice, a “freeze” warning in Florida will cause price to move against you, and can likely consequence in a limit move – a catastrophe you should closest take steps to avoid!

* A price move generally results in a series of minor retracements; leaving a sustain point during an increase in price, and a resistance point during a decline in price. It is a sensible strategy to place the stop-loss a little below the sustain point for the uptrend and above the resistance point for the downtrend.

* Timing of the order entry is basic. You need to predefine what your entry strategy will be during each phase of pyramid trading.

Closing Advice

You must do your homework and try different strategies using various price charts. By covering the price chart with a sheet of paper so you can’t see price action beyond the entry point, you can slowly move the sheet of paper rightward exposing later price action. This technique lets you retroactively “simulate” various strategies and react to market changes. Of course, you should also be entering the applicable data into your Pyramid Trading Form to track your “simulated” trade. This will give you skills and confidence to use this pyramid trading technique.

Special observe: There is substantial risk in trading commodity futures and options.

(C) 2008 Thomas Wnorowski




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