Breaking Off A Piece: Part 1
Here's the blueprint for one of the more interesting basic pyramidding campaigns that you can do in a stock. This is nothing original, I'm just throwing it out there for discussion because it is useful and the numbers work out nicer than many of the other variations.
The strategy can be used when two conditions exist: a) the stock is strongly trending up, and b) you want to own shares. For your campaign, you must identify up front the amount of "risk capital" for your operation. If your campaign is successful, you will have a block of stock, and have converted all of your "risk capital" back to cash for use in the next campaign.
Say we want to break off a $5k block of stock. For this specific campaign you will need 3 times that amount in risk capital, so $15k. After carefully identifying a good risk:reward entry point using your favorite technical analysis or tape reading, 1/3 of the risk capital ($5k) is committed.
If the stock moves in your favor 10%, commit another 1/3 of the risk capital ($5k). You will have committed $10k of risk capital and are carrying $10,500 of stock.
After the position moves in your favor another 10%, commit the final 1/3 of your risk capital. You will have committed the full $15k of risk capital and are carrying $16,550 of stock.
A limit order is placed to sell 3/4 of your shares 21% higher than your final entry. After the stock has advanced 21% from your final entry point, your position will be worth $20,025.50. If your limit order fills completely, you will have reclaimed your entire $15k of risk capital, and have a $5k block of stock.
At no point are you excessively exposing your capital to great risk. As the position moves in your favor, you will gradually be enabled to reclaim most or all of your risk capital if you stop out. If the position moves against you from the start, you will only take a loss out of 1/3 of your risk capital. What you have done is taken shares from people who are not managing the risk as well as you are. By managing risk in ways similar to this, a trader can break off quite a lot of stock over the years.
Here's a spreadsheet recap of the strategy:
|Risk capital||Percentage multiplier||Position size|
These numbers are just used as an example, there are all kinds of variations that can be used in different scenarios. A variation of this strategy can even be adapted for use by market makers to build inventory by adjusting the percentages way down.