Trend pyramiding is one of the strategies for increasing capital when trading on the stock exchange, the essence of which is the gradual opening of a series of transactions against the backdrop of a favorable trend. This increases the chances of a trader to achieve a stable income.
The principle of pyramiding in trading is based on the fact that after a positive outcome, the next rate doubles compared to the previous one. In this case, you risk only the amount earned and the minimum initial rate. And the amount of profit depends on the number of “steps” in the pyramid and grows exponentially.
The strategy is applied in any financial market – futures, stock and currency. In other words, during pyramiding, you add a new position to the previous profitable one against the background of favorable market movement in the direction that is favorable for you.
When you act strategically correctly, your trading capital is not threatened as the market moves in the direction that is profitable for you.
If the price breaks through the next resistance level, and when returning to it is fixed above this level, then you have every reason to add a new position. Therefore, the main prerequisite for the use of pyramiding is to make sure that the trend is stable.
The mechanics of doubling and tripling profits based on two principles :
- You enter the market, choose a small lot and set a stop in order to lose no more than 2%, if suddenly the price does not go in the direction advantageous for you.
- Then choose the next lot of the same volume and move in the same direction. All subsequent lots double.
6 key rules of pyramiding
- The iron rule of pyramiding with the trend is to strictly follow the ratio of profitability and risk 1: 2, since the risk must remain within ½ of potential income. If you have planned to make a profit of 200 points, then the size of the stop should be no higher than 100 points.
- The strategy requires a clear exit from the deals as soon as the first signals about the reversal of the chart appear.
- Your goals should be defined before the position is opened and future transactions must be calculated in accordance with them. You can open them with the same size or gradually increase, but the second option is more risky. Control the total risk and move the stop from the previous position to the level of each new stop.
- Use pyramid only on a steady trend. But initially determine for yourself the size of the position. Let it be small and slightly smaller than your standard. If the price goes in your direction, you will receive a profit. When the trend stops, it is better to wait until the correction or consolidation is completed, and only then open the next position.
- Do not complicate your trading and keep the same size of the transaction during the sale, follow the trading plan and do not be greedy.
- Trend-based pyramiding is not necessary for every transaction. You need to use them selectively – it’s safer. You can make only a few series of such transactions during the year, and this will significantly increase your income. At the same time, the risk in each transaction must remain within 2% of the deposit .
Advantages and disadvantages
The advantage of pyramid trading strategy is obvious – it allows you to increase income from just one transaction with minimal risks and therefore provides psychological comfort to the trader.
What is the danger:
- Trade is difficult to manage when you open a large number of transactions.
- Pyramiding can only be used for medium and long periods of time.
- The outcome of trade depends on the behavior of the trend for a long time.
- This method is suitable only for experienced traders who can correctly calculate the opening interval of transactions, accurately predict the pivot point and are able to close the transaction in time.
- It is extremely important to accurately calculate the end point of the pyramid – the slightest rush when closing a deal can deprive you of a significant portion of income.
- Pyramiding is not suitable for scalpers (their kitchen is completely opposite and correct for them). Moreover, it is not for lovers of fast money.
The biggest difficulty is getting into a favorable trend. Well, when he rises up without kickbacks and do not need to close every deal immediately. In fact, circumstances rarely add up successfully, usually pyramiding with a trend is closed at the 2nd or 4th stage. And not always in favor of the trader.
Pyramid trading is the most profitable way to accumulate profits. But if you use it more often than once a month, it means that you are not well chosen for the transactions to which pyramiding can be applied.
To master the strategy you will need a long practice. But the resulting profit is worth it to spend time and energy on it.
Even before the conclusion of the first transaction, you must have an exit plan ready. In general, it is better to make any trading plan impartially, in a cold state of mind, otherwise emotions will lead to unpardonable mistakes. Therefore, do not leave anything to chance and make the most objective decisions in advance and make the calculations. Do without additional risks wherever possible.
Pyramiding is considered an aggressive strategy that is not suitable for every trader, because it requires perseverance, composure and the ability to make decisions quickly. But this is an ideal way to quickly disperse a deposit.
Beginners confuse pyramiding with Martingale. The key difference between the two is that no analysis is required in Martingale – you simply open trades, doubling them each time. In the case of pyramiding, you will constantly have to analyze the market and look for an uptrend. Otherwise, you will not have a grid of profitable orders.