Reverse Pyramiding and Financial Spread Betting
Where the pyramiding strategy works with spread betting is in providing an addition leg-up to emphasise winning positions. Much less about putting your money where your mouth is than grabbing more of a good thing, pyramiding can be a highly efficient way to trade, ensuring you squeeze every last bit of profit out of a favourable position. That's just sensible trading - after all, winning trades are often hard to come by, so it pays to try your best to make the most of them.
Where pyramiding falls down is that it only functions in a winning market. If your position starts losing money, the logic of pyramiding can't really stand up to scrutiny, and it would be potentially highly risky to try and shape the markets in your favour with enhanced exposure to loss. With a slight tweak however, and pending market conditions, reversing the pyramiding strategy can be a good way to minimise your possible losses overall, with a view to exiting the position as soon as you break even.
What Is Reverse Pyramiding?
Reverse pyramiding is so-called because it deals with the scenario where markets are falling, rather than rising. The strategy behind it is almost identical to regular pyramiding, except the objectives of this trading method are more to recoup losses by reducing the average break even point between two transactions, rather than aiming to profit from the unprofitable.
Say you opened a position in the market for the FTSE at £1 a point, and the FTSE fell by 50 points from 6000 to 5950, but had the potential to gain more ground in a late afternoon rally. The reverse pyramiding opportunity here would see you buy in at £1 a point at 5950. While this might sound counter-intuitive to buy in to a losing market, this creates an interesting effect for that trade.
At 50 points down, your position would have had to recover quite heavily in order for you to just break even. But buying in at a level 50 points below means that you've effectively halved your deficit, needing only a 25 point rise to break even. If the markets do rise by 50 points, your otherwise break-even position becomes a profitable position by 25 points. While you're potentially paying in more for the privilege of halving the ground you need to make up to break even, this can be a strategy that proves worthwhile if you're caught short on a trade.
In an ideal world, every trade you execute would go swimmingly, and you'd always be able to recoup any minor losses over time. Of course, as any experienced trader will tell you, we don't live in an ideal world, and the dangers of the markets at the best of times are potent and potentially lethal, as far as your trading capital is concerned. It must be remembered that while every point upwards is a multiple of your stake in profit, every similar move downwards is a multiple against your trading pot, and so getting more heavily into losing positions is not for the feint-hearted. Not being too aggressive with your leverage is the key to success here - traders must ensure they are well covered and can afford to meet the worst of any potential losses to avoid running into difficulties with this kind of strategy.
Reverse pyramiding can work pretty well with spread betting, but only where there is the possibility of a market recovery. Depending on the trading circumstances, you may require more or less of a movement in the markets to recoup your losses, but by being selective in how and when you adopt this kind of strategy, you can implement the reverse pyramiding approach to best effect.