Pyramid trade is adding a new trade on top of the original. It can be same size as original trade or smaller: I’ve not heard of anyone using a system of larger pyramid trades.
The idea is that when your original trade is proven to be a good idea as price move sin your direction, you add to its size with a second trade, then maybe a third, fourth etc. New trades can either be added on new entry signals or automatically when profit has covered your initial risk. Its a tricky strategy as the ratio of break-even trades and small losing trades increases at first, though the gains from the successful pyramids can be very large.
Yes. A pyramid trade can only be added to a winning trade. Some traders also move the stop-loss on the first trade to break-even when they add the second trade.
e.g. Your long trade has a stop-loss £100 below entry. When it makes a profit of +£100, you add a second trade of the same size and you set its stop-loss likewise at -£100. But you move the SL on the first trade to +/-£0. So now the worst that can happen is that you will lose £100, which you already rated as acceptable. But if price goes up, you will have twice the profit. If you add a third trade and move the two earlier stop-losses, you will have 3 times the profit potential but still only be risking £100 from your account.
I try to do it every time I make a profit equal to the initial risk - IF - the trend is just as strong or stronger. Unfortunately, that means not every time I trade. Also, you have to accept that on a higher percentage of trades you will make no money or even the initial loss.
So if risk on your first trade T1 is -£100 and take profits at +£100, then you have gained £100 obviously.
If instead you add T2 and move T1’s SL to 0 and give T2 a -£100 risk also, then if the trade goes against you by the same number of pips, you have lost £100. If T2 also gets to +£100 and you add T3 with a -£100 risk, and move T1’s SL to +£100, then if the price moves the same number of pips against you you have now lose nothing - T1 made £100, T2 was break-even and T3 lost £100.
But if you had a TP on T1 and a TP on T2, the same price behaviour would have made you £100 + £100: T3 would have still lost but as its also only £100 you would still be up £100. This can be hard to bear as you see many lost opportunities even if you’re not losing money.
This helps a lot. Thanks! I’ll be on the lookout for a situation where this can be used. I’ll let you know! Don’t think I have enough experience to tack on 3 trades though so I’ll stop at 2 for now.
Don’t think I have enough experience to tack on 3 trades though so I’ll stop at 2 for now.