Pyramiding in Forex trading, is all about adding to a profitable trade in order to make even more profits. It can allow Forex traders to deduce very large profits if performed correctly, as good trades continue to grow. Pyramiding is generally used in long-term investments, but it can also be used in shorter-term trades too.
In Forex trading, pyramiding trading strategies merely consist of adding to growing, profitable trades in order to maximize their returns and these types of strategies don’t even have to be risky either. What is risky about pyramiding, is that in the case of longer positions, a pyramiding Forex trader will have to pay a higher price when their trade in question is going strong, which can damage their profits made on their original position if their trade begins to reverse. However with pyramiding, if the trade in question continues to profit, the currency trader can make a much more significant amount of money. If a trade is going strong in one particular direction and especially if the trade in question is long-term, then pyramiding can be pretty risk-free and a great way of maximizing profits.
As long as you only increase the sizes of your positions on trades that are clearly doing well, you should be fine. Of course there is always a chance that your trade will reverse and fall in value which could be quite damaging, but the risk is fairly minimal when it comes to longer-term trades as currency pairs tend to move strongly in only one direction in the long run. It is also possible to use your previously made profits on open positions to save yourself from making a loss after pyramiding; you can add to positions in a way that allows you to both make more profits if your trade continues to grow and avoid losses if your trade reverses by using your previously made profits as safety.
Before you consider pyramiding though, you should be aware of the following two issues with it:
1) Gaps in the Forex market can cause traders to get stopped out, meaning that pyramiding traders are at even more risk since they add to positions at higher prices. A gap is simply a break between a currency pair’s prices on a price chart, when a currency pair’s price makes a sharp increase or decrease with no trading being carried out in between. They are often associated more with stock trading, but they can happen in the currency market too.
2) Large price movements between the two entries of a pyramiding Forex trader can cause the newest additions to open positions to wipe out the profits made through the pyramiding Forex trader’s first position, as the potential losses of the newer positions can dwarf the initial position and completely wipe all of its profit out and even more.
In conclusion, pyramiding can be used by currency traders to maximize their profits through adding to already profitable positions, especially if they are long-term ones. Pyramiding strategies are particularly effective in trending markets, since they are less risky. The best way in which you can limit the amount of risk you expose yourself to when pyramiding, is through moving your stops up continually. You should also avoid markets for currencies that you believe are particularly vulnerable to price gaps. You should also try to ensure that any additions to your open positions and any changes in your stops will still leave you with profit even if the market for the currency pair in question reverses. You do need to be fairly aware of your open positions and the FX market if you want to be able to pyramid in Forex trading successfully, however, it can be extremely rewarding if done correctly.