Pyramid Positions in Forex

Buying and selling the Forex market is one of the most exciting, fast-paced trading decisions you will ever make. Currency prices are well known for swinging wildly in a particular direction by 100 to 200 pips, at a moment’s notice, sometimes for no exact reason in particular.

So how do you capitalize on this type of market? How do you ensure that you are following the proper trading ideas – i.e. maximizing profits whilst minimizing losses? We have some solutions which might help to achieve just this.

Building on Winning Trades

There is literally nothing better than buying a particular currency, and then within minutes seeing the pair surge upwards on a wave of optimism. You know that you had the right idea at the right moment, and the decision you took to buy that currency was the right one.

This is where we should mention the “trend”. It is a statistical fact that when a currency moves in one direction, it is more likely that at any given point, it will continue to move in that direction rather than reversing. This is why people who try to pick bottoms and tops often fail miserably in their trading.

So – if you are sitting on a winner, what is the logical thing to do? One of the ideas might be to add to your existing position, and hope that the currency continues on the positive course.

Here is an example of how such a trade might pan out:

  • You buy EUR/USD at 1.3200 and it rises to 1.3300 shortly after the trade.
  • Instead of closing the trade for a 100 pip profit, you buy another 2 lots of the currency.
  • Because of the trend, EUR/USD continues to rise to 1.3350.
  • You close your position at this point.
  • Your profit is the 150 pips on initial position + 50 pips on both secondary positions.

Here, you have clearly benefited from the prevailing trend in the market and have capitalized on a position where the intuitive feeling may have been to just take the profit at 100 pips.

Building on Losing Trades

It should be noted that building a pyramid strategy for losing trades is absolutely not the same as the above. Staggering your entries should only be used by people who are experts in the field – and for position traders who want to balance and average out their average cost at a “better” price.

Remember, whilst pyramid trading can be hugely beneficial to profits, it also magnifies any losses if the market was to reverse – so careful monitoring needs to be done at all times to ensure that the position is safe and guarded.