As a retail forex trader, your end
goal is always to get as much out of a successful trade as possible and
minimise your losses on unsuccessful trades. Most beginner traders will
essentially open up a position when they think they have seen a favourable entry
point, then let it ride until it is time to close the trade. A more experienced
trader will open a position then watch the price action on that trade and if
things are moving favourably, they will increase the size of their position on
that trade, somewhat similar to doubling down. This technique is called pyramiding
and has the potential to greatly increase profits from a successful trade,
without a concurrent increase in risk.
Pyramiding Explained
The simplest way to explain pyramiding
as a forex trading
strategy would be to say that when you’ve opened a position and the price has
move successfully for you, you will then reinvest those profits back into the
position. If the price keeps moving in a favourable direction, your profits are
greater than if you had just kept the original trade amount. If the price then
moves against you, you can simply close out the trade and not have lost any of
your funds.
An Example Pyramid Trade
Let’s assume that USD/CAD is
trading at 1.3215. Since the Canadian dollar has not been strong recently,
there is a very strong uptrend in the USD/CAD pair. Your analysis of the market
leads you to believe that this trend will continue, so you enter the market
with a $1000 position.
Now, the price rises to 1.3315. At
this point, you are up $1000. You move your stop loss up to 1.3215, and buy a
second mini-lot. Essentially what has happened now is that you have a trade
which risks only $1000 in total, but has a $2000 position. You have doubled
your position without any increase in risk.
If the trend continued and the price
moved to 1.3415 you could then move your stop loss up again – this time to 1.3315
– and buy a third mini-lot. You are now guaranteed a $1000 profit on your first
mini-lot and to break even on your second mini-lot. Your risk on the third
micro-lot is $1000. In other words, your total risk is zero – this is now
turned into a free trade.
If the trend continues and you exit
your position at 1.3515, you are well into profit. You’ve made $3000 on your
first $1000, $2000 on your second $1000 and $1000 on your last $1000. That is
double the profit you would have taken on your initial entry.
The Risks of Pyramiding
This technique is only viable in a
strongly trending market, for obvious reasons. Also the stop loss here is
hugely important, if you forget to set the stop loss, any market movement could
completely wipe out your trade.
Lastly, as with all trades, have an
exit point in your mind. Just keeping a position open and hoping for the trend
to continue is not trading, that is gambling. Be disciplined, close your position
when you plan, and enjoy having a profitable trading career.
