October 21, 2013

Forex Trading Strategies: Pyramiding

This article looks at the pyramid forex trading strategies and how to use them when trading forex.

Pyramid Forex Trading Strategies

When entering the foreign exchange trading market, a new trader will discover there are various trading strategies to choose from.  It is important that the individual has an understanding of their personality traits to choose the best strategy.  Those who opt for short-term strategies are generally impulsive, whereas the long-term traders have more patience and prefer to see their trades progress over time.  However, there are some strategies that are more suited to experienced traders and pyramiding is one of them.

What are the pyramiding forex trading strategies?

Pyramiding is a strategy whereby the trader will add to positions placed as the price moves in a profitable trend direction.  As it is highly risky, this should be undertaken by full-time, experienced traders with a great degree of discipline.  The trader must be able to work according to predetermined trading plan and always control the risk effectively with stop loss orders.

While pyramiding can be highly beneficial, the profits will only increase if the trend continues heading in the desired direction.  If the market suddenly turns and the trend reverses, then the losses can be devastating; hence the need for strong stop losses.  By adding to positions one alters to cost of the entire position on per unit basis, therefore it is important that a trader conduct a risk/reward ration before engaging in pyramiding.

The signal used to add to positions must be placed at predetermined points on the predicted trend line.  These signals can be identified by conducting technical analysis with different trading tools such as moving averages, logical chart points, etc.

There are different types of pyramid strategies, all which be discussed below.

1. The standard pyramid

The standard pyramid is the most popular of the different type of pyramid techniques.  It is also known as the scaled-down pyramid or upright pyramid and begins with a large initial position.  This initial position is the followed by a series of predetermined additions which decrease in size as the price continues alone the trend.

2. The inverted pyramid

This is also known as the equal amounts pyramid as it adds equal-sized amounts at each increment point.  However, the average cost is much higher here and a smaller price reversal can eliminate all profits potentially made.  This type of pyramid offers much greater profit potential than the other types of pyramids, when compared to the risk of course.

3. The reflecting pyramid

The reflecting pyramid is similar to the equal amounts pyramid to a particular point on the trend, and then begins to reduce the position as the trend continues.  This indicates that this type of pyramid does not follow the trend entirely, but deviates slightly.  It should be noted that the reflecting pyramid is one of the least profitable of all pyramid strategies.

4. The maximum-leverage pyramid

The maximum-leverage pyramid is potentially the riskiest of an already risky strategy.  This requires an addition of maximum sizes to the limits of accumulated profits and margin requirements.  While this type of pyramid can offer the greatest profits, it will also present the greatest losses should the trend turn against you.




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