Curious Cat Investing Dictionary: Pyramiding

Pyramiding - A stratgey to increase the position as the postion moves in the investors favor. For example, rather than just letting a gaining position run adding to the holding at ever increasing prices. Livermore and Darvas both practiced this strategy. An aggresive stratgey used by some technical traders.
The additions to the positions are often made as the stocks continue to make new highs (since this style of investing is normally based on some sort of breakout system). It is a stratgey to maximize gains - to find big winners (going for "home runs"). With such a strategy, the decision to sell is not as easy to define but is usually recommended when the "stock shows weakness."

In the most aggressive form of pyramiding the increased margin buying power provided by gains is used to buy more. Obviously doing so is a very aggressive strategy that can have high rewards and high risks.

• Cutting Losses - selling positions that move against the investor. A strategy used by technical minded investors. A strategy mentioned by Jesse Livermore and those who followed him such as Darvas and William O'Neil. O'Neil has a rule not to let a stock decline more than 8% (he will sell earlier but not hold if a stock falls any more than 8% from the purchase price). The concept of cutting losses is one of the most accepted axioms and one that successful investors repeat as the key to success.
• Letting Winners Run - keeping those positions that are increasing. Along with, cutting losses, the concept is to stay in the positions that are doing well and sell those that are lossing. The idea is to keep those stocks that may become big gainers (which have to start as small gainers) rather than selling after a small move and watching the stock continue to gain after it is sold.

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