Forex pyramiding technique
And to maximise success in the markets we do need to embrace a certain degree of controlled risk. So the first thing my mentor had me do was take a one-contract position in the market — and never be flat.
What is Pyramid trading?
I could change direction as a saw fit, for example I could be long all morning and then flip to a short position if I thought I detected a change in trend, but I could never be completely out of the position. The exercise lasted for two weeks. But if you focus on getting yourself in tune with the ups and downs of market price, the profit will inevitably follow. You start to notice little quirks and characteristics of the market because you are financially committed and fully involved. If you did want to conduct a similar exercise yourself, the micro lot Forex contracts can let you have a go for pennies per pip.
We could then actually choose when to enter our positions! This time, you could choose when to get in, but when you felt the urge to exit the trade, you had to double up.
Forex Pyramid Strategy
You bought a second contract instead of exiting. It added to your position.
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And you know what, very often the trade rolled on into super-size profits. To enter the position he buys one standard lot at the ask price 1. Now the pyramid trader seeing the same opportunity takes a different approach. The maximum exposure will still be one standard lot, but the pyramider splits the entry into four separate orders.
The pyramider enters at an average price of 1. Based on this new information the pyramid trader decides to abandon the trade idea and close out on a small loss. The pyramid trader closes the position at 1. Meanwhile the regular trader, also deciding the trend is going the other way closes at the same time and at the same price.
That is three times that of the pyramid trader. As well as achieving a better entry price due to averaging, the pyramider had more flexibility and was able to exit before being full committed when the trend turned the other way. In the above example, the pyramid trader had more choices and therefore could be a lot more flexible in his strategy. He was able to abandon the trade idea early on when the trend went the other way. The other trader was fully committed up to his risk limit right from the start.
This leads on to the second advantage of pyramiding; the ability to build on winners and drop losers.
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A pyramid trader accumulates the position as and when the trend moves in the direction of profits. By managing separate stops and take profits on each position, the pyramid trader can build on a winning trend and at the same time, gradually lock in and accumulate profits. Notice how the profits are pyramided as the trend moves in the direction of profit. Pyramid trading has much in common with grid trading. Both systems use split orders and usually make use of pending stop and limit orders. To profit from a growing bullish trend or a potential bullish breakout a pyramid trader will deploy buy stop orders.
For the other direction sell stop orders are needed to follow bearish trends or to enter on a bearish breakout. A pending buy stop order executes only if the ask price reaches or goes higher than the value set in the order. This makes it useful for situations where you want to enter a trade only if the price goes higher. In a pyramid trading system we want to set the orders to execute one by one as the trend moves higher. Either the stop orders are placed all at once or more typically they are cascaded so that as one executes a new order is placed.
On the 5 th of February, the price again broke through a new resistance level and retests as a support area. We did a lot of buying up until this point and built 80, units in one single pair. So the real question by the end of the third position is how much of our money is at risk?
In the above chart, we can see the final trade setup of all the three trades we took. By the end of all the three trades, we made a profit of 28 percent. The profits on each of the trades have compounded throughout the process, where the risk in each trade remains the same. Overall, we have generated 12R, 10R, and 6R in the first second and third trades, respectively.
Never forget that the pyramid strategy works very well only in the trending markets. Also, try to avoid using this strategy in volatile markets. Pyramiding is a great way to compound our profits in a winning trade. Knowing when to use and when not to use the pyramid strategy is the crux here. Hence it is advisable to read the different market situations on a demo account first before using this strategy on a live account.
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Scaling Into Trades for Profit: Pyramiding Up
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