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2. Commodity Pyramid Trading Characteristics

This chapter describes the general commodity pyramid trading characteristics using the pyramid technique and discusses things you must do to enhance your success.

A.   Pyramid/Pillar Trade Characteristics

This course describes the process of commodity futures trading in such a way that when the profit from a single trade equals the current margin for the commodity, the profit is used to self-finance an additional futures contract. This self-financing process can take either of two methods: pillar trading or pyramid trading.

The pillar trading method involves adding one futures contract to your position during each self-finance round, while pyramid trading adds one futures contract – but from each active futures contract with each self-financing step. This results in a doubling of your position during each self-financing step. This course describes both the pillar trading and pyramid trading process, with examples of each.

Both pyramid trades and pillar trades (hereinafter referred to as pyramid trades) should exhibit several characteristics which make them high profit potential candidates. These characteristics include:

• The market is quiet and has exhibited low volatility for several months.
• The margin for the commodity is relatively low.
• The market is set up for a major move. This is evidenced by extreme commercial/public signal, as well as a 12-month high or 12-month low on the daily price chart with a likely 1-2-3 Top or Bottom price chart pattern in the process of unfolding.

A VERY IMPORTANT NOTE: The biggest danger in any futures trade is a limit move which goes against your position. With a single futures contract, this is risky enough. With multiple futures contracts, this risk is seriously compounded. However, if you monitor the market conditions (both technical and fundamental market conditions) and the financial news on a daily basis, you will generally receive a timely warning of an impending limit move which may go against your position – giving you time to close out your position before that occurs.

B.   The Pyramid Trading Form

The Pyramid Trading Form^TM (see Appendix C) is at the heart of helping you to successfully implement these trading strategies. It is completely described in Appendix C. You should also print a copy of this form and become familiar with its content.

Warning: You must always use an unaltered copy (never use the original) of the Pyramid Trading Form^TM each time you start a new pyramid trade. This is because the form contains numerous formulas, and by design some of these formulas may be overwritten with replacement data provide by you during the trade.

This Pyramid Trading Form^TM contains areas that will let you monitor and track up to three commodities using this trading strategy. Each area allows for up to 7 futures contracts to be held in the pillar trade position, and up to 64 futures contracts in the pyramid trade position.

C.   How To Identify A Good Pyramid Trade Candidate

At any point in time, there will be several commodities with differing degrees of profit potential. However, it is important that you identify the commodity which has the best chance of being a profitable pyramid trade. This means that you must perform a current analysis of all commodities to identify the commodity that meets the following requirements.

1. You must first use the Commercial/Public selection tools (described in my complete Commodity FUTURES Trading Course^TM) to identify the commodities that appear to be ready to make a major move. A subscription to my Bullseye Commodity Trader Newsletter^TM can make this selection process a snap.

2. Of these commodities, identify those that appear to be making either a 1-2-3 Top or 1-2-3 Bottom in the daily price chart. Calculate the daily 50% retracement target for each one. Also calculate the dollar amount the move represents.

3. Where applicable, use the weekly chart to calculate the weekly 50% retracement target for each commodity. Again, calculate the dollar amount the move represents if the weekly target is attained.

4. Identify the margin requirement for each commodity. The ideal pyramid trade will be one with a relatively small margin requirement and with a dollar amount profit potential that is at least three times the margin requirement for the commodity.

5. The commodity which you select must be a quiet commodity – that is, one which does not have wild price swings.

6. The commodity you ultimately select as the best pyramid trade candidate must also have enough time to allow the move to unfold. This means you need to get into a more distant month to minimize loss from commission switch requirements (which can be expensive with 16 or more contracts in your position). Select the more distant commodity contract month that has 120-180 days available until the Last Trading Day (LTD).

7. The commodity which you have selected must have a daily volume of at least 10,000 contracts for adequate liquidity. Open interest should also be 10,000 or more.

It's important to remember that once you are in a trade, you must religiously perform an analysis on a daily basis so as to identify any changes in the original analysis that may adversely impact your trade. In addition, you should always monitor fundamental "news" which will affect the price of the commodity. For example, if you're short Orange Juice – and Florida has a freeze warning – close your position fast!

The next chapter covers Commodity Pillar Trading Examples.

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