Preface: This article has been designed and optimized for the The Chartist's Growth Portfolio. The principles contained herein are effective for any trend following strategy of any time frame, but all references will be directly related to the The Chartist's Growth Portfolio.
The term ‘pyramiding’ refers to the adding of positions to an existing holding as the share price moves in the direction of the current trend. For pyramiding in bullish market environments this means adding positions as the price continue to rise. It does not refer to adding to positions as price falls. Adding to losing positions is a quick way to the poor house. The simple concept of trend following is to buy strength; buy high and sell higher. The key benefit of pyramiding is that a clean and sustainable trend will allow excessive gains to be made with minimal additional risk taken. It could be argued that one single clean and sustainable trend can double or even triple a non-pyramided account return in any given year. Obviously there are downsides as well that we will discuss later in more depth.