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Pyramid Your Position as It Becomes Profitable

Pyramids are burial vaults. Unfortunately, many traders mistakenly believe that as a market moves in their favor, they must add successively larger numbers of contracts to capitalize on the move. What happens, of course, is that the pyramid is built upside down. These individuals will buy one unit at the start of a move, add two or three more at a higher price, and add five or six more at an even higher price. The pyramid becomes top-heavy, and the slightest change in trend will send it crashing to the ground along with the trader's profits.

If you're going to build a pyramid, build it with a sound base. Establish your largest position at the beginning of a move and add successively smaller numbers of units as the market moves in your favor. You will still have a good-sized position when the move comes to an end, and your average cost will be much better than if you had built the top-heavy pyramid. In spite of all we know about futures trading and all that has been written about the ill-advised procedure of the top-heavy pyramid, there are still traders who think this strategy will work for them; however, success is rare indeed.

Attempt to Pick Bottoms and Tops as Often as Possible

After all, the better your entry and the better your exit, the more money you stand to make. The reasoning sounds good, and if there were a good way to pick tops and bottoms with a high degree of accuracy, the reasoning would be correct. But tops and bottoms are elusive, and they are dangerous. Often a great deal of volatility is associated with tops and bottoms, making them hard to find and hard to stay with once they have been found.

Buy Futures Options to Limit Your Risk

This is a wonderful way to throw your money into the deep, dark hole. At first blush, this strategy seems just as logical as do many others. Joe Granville, stock market guru of the 1970s, used to say, "If it's obvious, then it's obviously wrong." This is especially true in futures options. In practice a vast majority of puts and calls expire worthless. To buy a call when you expect an uptrend or to buy a put when you expect a downtrend is often a waste of time, money, and commissions.

Options lose time value quickly. Your timing with options must be even better than it is with futures; it's a case of double jeopardy. You buy an option because you think you're buying time. You think that your timing need not be as precise as it is with futures because you can only lose your premium plus commissions when you buy options. This is the illusory aspect of the situation.

Professional futures traders who make money with options are most often sellers of options, since they know that most options expire worthless. They sell a deteriorating asset, and the odds are clearly in their favor. Thus, if you're going to trade futures options, do it in a professional way by using options strategies and by being an options seller rather than an options buyer. Unless you're willing to approach options in a professional way, don't even bother getting involved in this market.