August 24, 2011
Pyramiding - A High Risk High Reward Forex Strategy
Pyramiding is an interesting concept in relation to forex trading because it is the opposite to many of the more conservative trading strategies. Instead of closing part of the position when the first profit target has been reached, you actually open new positions instead, and continue opening new positions if the price of the underlying currency pair moves in your favour.
So you essentially add to winning positions in order to multiply your profits and benefit from the fact that your initial call was correct. It is a high risk strategy because you can end up with a large position overall, and possibly some big losses if your trade doesn't subsequently work out. However if the trade works out as planned, then the rewards can be huge, which is why the concept of pyramiding is often dubbed a high risk high reward strategy.
This style of trading is not for everyone, but I know one trader in particular who does this to devastating effect. He used to post a lot on the ADVFN forum, but unfortunately he made the decision to quit the forum earlier this year.
What he did was to look for positions on the 3 minute and 5 minute charts if I remember correctly on the major forex pairs (as well as the FTSE, gold and crude oil), and he mainly traded breakouts and new highs and lows using a select number of indicators for guidance.
He used to post his trades all the time and I know he used to make big profits. His losing trades were rare, but he made sure he cut them early either at break-even or for a small loss, but his winning trades, which he had pyramided up, were huge in comparison. The fact is you only need one or two of these pyramid positions to come good because they will more than compensate for any losing trades.
This style of trading is not for me because I don't really enjoy the fast action pace of day trading that much, and the stress of having several pyramid positions open at one time would be too much. However I'm just making the point that it can be very profitable if you want to try using a pyramid strategy yourself.
I should make the final point that pyramiding does not refer to the strategy of adding to losing positions. This is something else entirely and is significantly more risky. Pyramiding is where you open a new trade once the trade is say 20 points in profit, and then open a new trade when it is 40 points in profit, for example, with a possible profit target of say 100 points.
You can move your stop losses down as the price moves in your favour in order to reduce risk, so it doesn't have to be all or nothing. You don't have to enter at set positions either. For example if you are pyramiding short positions, you could enter new positions every time the price breaks downwards and makes a new low, rather than entering new positions every 20 points, for instance.
Anyway the point is that the pyramiding strategy is one of the most profitable strategies you can use. However you do of course need a really good strategy in place to begin with, otherwise you could easily end up nursing some big losses.