LM portfolio as at 06/08/2021:
| Code | Sector | Date Bought | Cost | Value | Gain/Loss |
|---|---|---|---|---|---|
| LM026 LM026-2 LM026-3 |
ETF | 14/10/2020 09/12/2020 06/07/2021 |
£3430 | £3920 | 14.26% |
| LM028 | 'No specific industry' | 16/11/2020 | £1010 | £1210 | 19.53% |
| LM032 LM032-2 |
Industrial Transportation | 07/12/2020 20/01/2021 |
£2070 | £2790 | 35.19% |
| LM033 LM033-2 |
Health Care Equipment & Services | 04/01/2021 03/08/2021 |
£2320 | £2550 | 9.85% |
| LM034 | Food & Drug Retailers | 18/01/2021 | £1020 | £1210 | 18.54% |
| LM035 | Food Producers | 19/01/2021 | £1040 | £1110 | 5.99% |
| LM037 LM037-2 |
Life Insurance | 03/03/2021 05/07/2021 |
£2290 | £2630 | 15.09% |
| LM038 | Banks | 10/03/2021 | £1020 | £1140 | 11.59% |
| LM039 | Pharmaceuticals & Biotechnology | 30/03/2021 | £1030 | £1140 | 11.35% |
| LM040 | General Financial | 27/04/2021 | £1020 | £1080 | 5.73% |
| LM041 | Real Estate Investment Trusts | 27/07/2021 | £1270 | £1310 | 2.92% |
| LM042 | Construction & Materials | 27/07/2021 | £1270 | £1260 | (0.59%) |
Let's talk about pyramids
Previous updates have mentioned "pyramiding" trades - which is where I will add more to a trade as it moves in the right direction.
Take for example the oil trade discussed in last week's update. That trade began as a one unit purchase in November 2020 and then as the price of oil increased, another unit was added in January 2021 and then another in March 2021.
The net result was that I had three times my usual investment amount in oil by the time I got the closing signal. And because I had three times the usual investment, I made more profit on this successful trade.
Now I only add more units when the trade heads in the right direction - the price moves up. Had the price decreased then I wouldn't have purchased any more. Purchasing more as an asset's price decreases is known as "averaging down" and isn't something that I'd consider a good idea. For me, if the price heads down then the only move worth making is selling the asset.
I orignally got the idea to invest in this manner from a seminar I watched on DVD. It had some specific rules about when to add to a trade and how much to add. It detailed rules that used ATRs to specify the levels at which to buy or sell more of the particular instrument you were trading.
In this LISA Millionaire experiment the rules are similar but I have simplified it a little:
(1) Each trade will start with a "pilot purchase" of one unit (at present a unit is roughly £1250)
(2) If the trade gets to around 20% in profit then I will consider adding another unit
(3) Max units in any one trade is two, although in the oil trade mentioned last week I broke this rule to go to three
(4) The trade will be closed on either losing 20%, moving below the 200 day SMA or closing on the 20 day lowest low in the case of a commodity
The way I understood the message from the seminar was that if you were to open a book shop you wouldn't buy 100 copies of a single book immediately as you've too much at risk. A more prudent strategy would be to buy a handful of that particular book and then if they sold well, buy some more.
Applying this to trading, you make a small initial purchase and then add more as the trade goes into profit.
Of course, with a small portfolio it isn't feasible to make a "small initial purchase" like one or two percent of your total bank.
With £20,000 this would only be a couple of hundred pounds which would go nowhere thus we use a higher percentage (in this case 6.25%) and keep a close eye on the trade, logging in once a day to make sure all is well.
As the bank grows the initial trade amount will come down as a percentage of the total bank.
Pyramiding trades works to reduce the risk in your investments as you aren't exposing as much money at the beginning. However, if you add more cash as your trade becomes profitable, you can still make good returns.
Considering the significant benefits of pyramiding trades, you will see that a new unit was added to LM033 this week. And LM034 is threatening to require one soon should it continue to rise...