Pyramid Trading Strategy Forex
The pyramid trading strategy is an effective approach that every forex trader should understand. It lets you follow a trending move and potentially capture anywhere from 100 to 2,000 pips when the strategy is applied correctly. For more, read about Broken Trend Line Strategy.
Depending on your position size and the size of the move, that can translate into a meaningful percentage gain on your trading account, though results vary from trade to trade.
Let your profits run.
With the pyramid approach, you work toward that by adding to a position that is already moving in your favor.
You can’t pyramid every trade you take, but now and then a strong trend gives you a real opportunity to do it.
Below is how it works, including the type of forex trading strategies you can use to apply the pyramid technique and build on a position.
What is pyramid trading?
It is a trading technique where you keep adding new trades to your profitable positions as long as the trend keeps moving in your favor.
The main benefit of the pyramid technique is that it can let you build a larger position for bigger potential gains. When it is done correctly, the aim is to add little or no additional trading risk, though no approach removes risk entirely.
How the pyramid trading strategy works
The pyramid technique works by adding trades on top of positions that are already profitable.
For example, EURUSD is in an uptrend and your trading strategy gives you a buy signal:
You enter a buy with one contract and place your stop-loss. That is your first trade.
Then your trading system gives you another buy signal, so you buy a second contract and place its stop-loss. That is the second trade.
Now you move the stop-loss of the first trade to exactly the first entry level, the same level where you placed the stop-loss for the second trade.
This way you carry only one risk: the risk on the second trade.
You have no risk left on the first trade.
Then you see another buy signal and take a third trade, placing its stop-loss.
Now you move the stop-loss on both the first and second trades to the second trade’s entry level.
That way the first trade is well in profit and now trades with no risk, and your only risk is on the third trade.
Don’t increase your trading risk
This is an important part of the pyramid trading strategy: you never increase your trading risk on the later trades you take after the first one.
Another important factor is to open a new trade only when the earlier trades have their trailing stop-loss set to lock in profit.
So if the current trade you add turns into a loss, you only lose that trade, while the earlier trades keep their locked-in profit. You come out with profit from all the trades you took along the way as the market moves in your favor.
What trading setups you need for the pyramid strategy?
Whatever trading system you use, as long as you trade with the trend, you can apply the pyramid trading strategy.
The 123 pattern is one of the best setups for applying the pyramid trading strategy.
Advantages of the pyramid trading strategy
Instead of a single trade giving you a 50-pip profit, you can hold several trades that together give you more profit.
This is one technique that can grow your trading account quickly over a short period when it is done correctly, though outcomes are never guaranteed.
The only risk across the multiple trades is on the current trade, since all the remaining trades should have their stop-loss moved to protect profit.
You can’t apply the pyramid strategy to every trade. Sometimes your trading system gives only one signal, or the trend changes.
The pyramid trading strategy involves identifying profitable positions to make the most of technical tools that are working well, allowing for larger gains as position size grows. It doesn’t require increasing your risk when it is done correctly, and the same concepts can be applied to short selling too.
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