Pyramiding is a trading system that drip feeds money into the market, gradually as a trend develops.

This strategy has several advantages. The two main ones are risk limitation and winner building. We’ll see each of these in turn.
Risk limitation with Pyramiding

The first and most obvious reason why pyramiding is used is that it limits the risk. The easiest way to appreciate this is with a simple example.
Pyramid trading
Pyramid trading © forexop

Suppose a non-pyramid trader thinks EUR / USD is on an uptrend. And you want to buy EUR / USD to enter the trend early. The last sale price was 1.1000. The maximum exposure that the trader can compromise is a standard batch. To enter the position, purchase a standard lot at the 1.1000 selling price. With this trade you have entered the full exhibition in one fell swoop.

Now the pyramid trader seeing the same opportunity has a different approach. Instead of entering the one-shot position, the pyramid trader will grow the position only if the EUR / USD uptrend advances as expected.

The maximum exposure will remain a standard batch, but the pyramid divides the input into four separate orders.
EUR / USD entry Size
1.1000 Buy 0.25
1.0900 Buy 0.25
1.1020 Buy 0.25
1.1035 Buy 0.25
Data encoding method:

The pyramid entered at an average price of 1.0989 while the non-pyramid operator entered at 1.1000.

But what if the trend goes the other way?
EUR / USD entry Size
1.1000 Buy 0.25
1.0900 Buy 0.25
1.0850 Buy
1.0810 Buy –
Data encoding method:

Let’S assume that instead of raising the trend, EUR / USD starts to turn bearish after the second trade entry. Based on this new information, the pyramid trader decides to abandon the Trading idea and close a small loss.

The following table shows the results of the two approaches
Pyramiding No pyramiding
Average input 1.0950 11000.
Starting price 1.0850 1.0850
Size from 0.50 to 1.00
P / L $ -500 -1500
Data encoding method:

The pyramid trader closes the position at 1.0850 making a loss of $ 500 having committed only half of its maximum holding size.

Meanwhile, the regular trader also deciding that the trend goes the other way closes at the same time and at the same price. Because it entered at a higher average price and committed all at once, it makes a loss of $ 1500. That’s three times that of the pyramid trader.

In addition to achieving a better entry price due to the average, the pyramid had more flexibility and could leave before fully committing when the trend turned the other way.
Blocking profits and building winners

In the above example, the pyramid trader had more options and, therefore, could be much more flexible in his strategy. He was able to abandon the business idea from the beginning when the trend went the other way. The other trader was fully committed to his risk limit from the start.

This leads to the second advantage of pyramiding; the ability to build on winners and losers.

A pyramid trader accumulates the position as the trend moves in the direction of earnings. By managing separate stops and making gains on each position, the pyramid operator can take advantage of a winning trend and, at the same time, gradually block and

Order management with a pyramid strategy

Pyramid trading has a lot in common with Network trading. Both systems use split orders and generally make use of pending stop and limit orders.

To benefit from a growing bullish trend or a possible bullish breakup, a pyramid trader will implement buy stop orders. For the other direction, sell stop orders are needed to follow bearish trends or to enter a bearish break.

A pending purchase stop order is executed only if the sale price reaches or exceeds the value set in the order. This makes it useful for situations where you want to enter a trade only if the price goes up.

If the market does not reach the set price within the time limit, a purchase stop will expire without covering.
Figure 1: blocking and increasing profits with a pyramid
Figure 1: blocking and increasing profits with a pyramid © forexop

In a pyramid trading system we want to set the orders to execute one by one as the trend moves higher. Arrest warrants are all placed at once or more are typically cascaded so that, as it is executed, a new order is placed. See Figure 1.

This system increases the size of the position only after the gains on the first trades are already blocked, which limits the risks to the downside.
A simple pyramid trade

The market outlook is bullish. To benefit from this, a pending purchase stop order will be placed at a distance of 25 pips above the current market price. If that purchase stop order is executed, a new one is placed at a distance of 25 pips above that entry. This process continues until the system shutdown is reached.

The stop loss is set at a distance 50 pips lower than the current offer price. In the execution of any order, stop losses for previous orders move to the same level at 50 pips below the current price. This blocks gains on trades that are already in gains.

There are no benefits of taking. This trading system allows the winners to run. The system-wide profit is realized when the trend falls low enough to execute the stop losses.

Each order size is ¼ of a standard lot.
Figure 2: let profits run
Figure 2: letting profits run © forexop

Figure 2 is an example of execution, and demonstrates how a pyramid trade captures profits in an upward (or downward) trend.

The blue line is the price. Red dots are the purchase stop orders that are executed. The Green Line is the average ticket price that is achieved. Gray bars denote the gain / loss in the entire position.
Average costs

Notice here that the green line resembles a moving average. Because we are splitting the order and reaching the market at a range of different points, there is a greater probability that we will achieve a price close to average. The more orders placed, the closer the average entry will be. This makes it much easier to exploit a gaming trend in a single entry.

With a single entry system there is a high probability of hitting one of the extremes, either buying too high or selling too low as the price fluctuates around its average value.

These settings are for example only. To experiment with different trade configurations, use the pyramid trade spreadsheet below.
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Advantages and disadvantages of Pyramiding

There is no such thing as a free lunch and that means that pyramiding has its drawbacks as well.

With pyramid money is fed by drip on the market. And although the risk is lower, the potential for profit is also lower because it achieves

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


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