Pyramid Trading is a way to turn small trades into big victories. Not all trades can work with this strategy but you do not need all trades to work that way, just a few that work perfectly can be enough to take your Forex Trading to new heights. Be aware that the positives to using a pyramid trading strategy can be tremendous but so can the losses if it does not work the way you hoped. If used incorrectly, pyramid trading can be extremely damaging. Make sure you understand exactly how to use this strategy before attempting to use it in actual trading.
Pyramid Trading or pyramiding is a way to double or triple your profits by scaling into a winning position. That means that you are confident enough that the market is moving strongly in one direction with strong momentum behind it. When doing this correctly, you will buy or sell adding to a current position after the market moves in your intended direction for an extended period.
A market that is trending up, with small drops along the way looks a little bit like a staircase. When the market looks like this it is an ideal time to scale your trading. At each small drop, you can order another buy. As the market continues to trend upwards, you increase the amount of currency you own so you will increase your profits.
It is extremely important to consistently retain your risk to reward ratio, never risking more than half the potential reward. If your profit goal is 200 pips, then your stop loss should be at 100 pips. With each new level that the market hits, you risk half of what you hope to earn. As you see the market gaining strength, you invest a little more and a little more and eventually if the market is really moving upwards you have tripled your profit, if you have invested three times.
This works in the opposite direction as well. When you see a consistent downward trend, you aim for a risk reward ratio of 1:3 for example. Then when you see that the initial investment is making the profit you are aiming for, you reduce the risk on that position to almost none, and then you invest again. At each step, you invest again after reducing the risk on the position before.
Of course, this is the simplest explanation and if you are going to adopt a pyramid trading strategy it is important to do extensive research. You should make sure that you understand both the dynamics and the mechanics of how this strategy works and what your best and worst case scenarios are before investing any actual funds. It takes significant understanding and experience to know exactly when to pyramid. Most important is to not get greedy. That is when things usually start to turn for the worse. Plan it out and stick to your plan rather than getting wrapped up in the excitement when the strategy starts to work.