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Today, we are going to discuss the pyramid trading strategy and how you can turn small trades into big winners, it's called pyramiding. You've probably heard of pyramiding before, generally it tends to have a negative connotation to it, but that's just because most traders don't understand how to pyramid properly. The Forex pyramid trading strategy you’re about to learn will greatly increase your chances of making consistent returns as a Forex trader. It can literally double or even triple your profits on a single trade.
A pyramiding strategy is considered a risky investment approach, but with proper money management can produce stellar results. Recently the market has taken a hard nose dive, with little or no retracements. If a trader was short, this kind of market environment would have been a prime candidate for a number or pyramiding strategies. In a pyramiding strategy a trader will want to add to their positions on each bounce.
When using the pyramid strategy, you should attempt to catch the trend right from its beginning. This is an extremely tall order as timing price moves is extremely difficult. For this reason, I recommend you use another technical indicator to assist with entering the trade. A good tool to assist you with the entry of your pyramid trades is the volume weighted moving average. Since the VWMA reacts to trading volumes, it will isolate false price fluctuations.
Regardless of the number of pyramiding trades, they all should be closed when the price breaks the VWMA in the opposite direction.
The example above illustrates a bearish break down through a period VWMA. If we were in a bullish trade, this bearish breakout would trigger us to close the position.
Since we will use the volume weighted moving average to determine when to exit our trades, the role of the stop loss order is not essential.
Nevertheless, we will use a stop loss. The reason for this is to make sure we are protected from a rapid price move against our trade position. This is the same example from above. This time, after we enter the long position on the VWMA breakout, we place a stop loss below the bottom at the beginning of the trend. Now we will combine the rules from above into a full pyramid stock trading strategy.
We will use a daily chart and enter trades when the price breaks a period VWMA. Every trade we take should be protected with a stop, which should be located beyond the spike created after the correction.
We will close all trades after the price breaks the period volume weighted moving average. Above is a daily chart of General Motors. The graph covers the period of Dec, — Feb, The image illustrates a pyramiding strategy. The first trend impulse is located in the beginning of the chart. Concurrently, we place a stop loss above the top created as a result of the drop. The price decreases further and gains distance from the period VWMA.
Later on, GM has a small corrective move. Don't despair if you think they are too many, because parameters are grouped into self-explanatory blocks. Keep comments tidy and respectful. Avoid spam, offensive remarks, self-promotion and posting personal or payment information.
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If you do, you will incurr in hedging and it won't. While higher prices will be paid in the case of a long position when an asset is showing strength, which will erode profits on original positions if the asset reverses, the amount of profit will be larger relative to only taking one position.
Why It Works Pyramiding works because a trader will only ever add to positions that are turning a profit and showing signals of continued strength.
These signals could be continued as the stock breaks to new highs, or the price fails to retreat to previous lows. Basically, we are taking advantage of trends by adding to our position size with each wave of that trend. Pyramiding is also beneficial in that risk in terms of maximum loss does not have to increase by adding to a profitable existing position. Original and previous additions will all show profit before a new addition is made, which means that any potential losses on newer positions are offset by earlier entries.
Also, when a trader starts to implement pyramiding, the issue of taking profits too soon is greatly diminished. Instead of exiting on every sign of a potential reversal , the trader is forced to be more analytical and watch to see whether the reversal is just a pause in momentum or an actual shift in trend. This also gives the trader the foreknowledge that he or she does not have to make only one trade on a given opportunity, but can actually make several trades on a move.
For example, instead of making one trade for a 1, shares at one entry, a trader can "feel out the market" by making a first trade of shares and then more trades after as it shows a profit.
By pyramiding, the trader may actually end up with a larger position than the 1, shares he or she might have traded in one shot, as three or four entries could result in a position of 1, shares or more. This is done without increasing the original risk because the first position is smaller and additions are only made if each previous addition is showing a profit.
Let us look at an example of how this works, and why it works better than just taking one position and riding it out. A stop will be placed on the trade so that no more than this is lost. We look at the chart of the stock we are trading and pick where a former support level is. Our stop will be just below this.
Next, the trade continues on in your favor and you decide to pyramid in with another 20k units at 1.
Excellent — Thank you Reply. The trade falls in your favor and so you proceed as planned by adding another 2 mini-lots at 1.