This pyramid strategy uses a method of creating orders based on their aggregation to produce a better return than from a single transaction.
There are many strategies which provide a better risk/reward ratio. The trader is not then “hemmed-in” by “high-efficiency only” trades. If every losing trade costs $ 1 and every winner makes $3, then his average of 30% means he will earn an average 20% per trade. This is based on the formula to calculate the expected value of his chosen system:
0.3 x 3 – 0.7 x 1 = 0.2.
This example need to take profit and stop-loss orders to be executed to be proficient. The Forex Pyramid Strategy assumes that as soon as the strategy is profitable, further positions are added to ensure that profitability is maximised.
Pyramid trading strategy as a methodology is only as good as the traders use of it. A flawed system will lead to flawed results. Some decide to maximize leverage to produce above average returns. Others disregard leverage and use the method to simply confirm the setup, entering transactions later.
This article will provide an insight into this methodology and highlight some advantages and disadvantages.
Traders who use speculative trading systems will see that only 20% of their trades tend to end in a positive (profitable) outcome. Vilfredo Pareto, an Italian Philosopher discovered “20% of the surveyed objects are related to 80% of certain resources”. In other words, you get 80% of your profit from 20% of your trades.
This rule is now referred to as the “Pareto principle” and is seen in various areas of life such as in sales, management and economics. In trading, this rule is also justified. Very often a maximum of 25% of trades, provide a positive return. Take a look at your account to verify this theory. Of course, this applies to strategies based on maximizing risk profit.
Tools used in this Strategy
Pyramid Strategy Trading is a method that will increase the likelihood of success by maximizing profits when there is a strong one-directional move.
Using Pareto’s theory, successful transactions will be in an 80:20 minority! So, why not utilize the maximum traffic to increase profit exponentially.
The Pyramid Investment Strategy, naturally, uses trend analysis since “trend is your friend” particularly in the method but also in trading in general. Pyramid strategy trading allows the trader to enter at the point correction is ending and the trend is returning to its prevailing state.
There are two components to the strategy. First, the exponential moving average and second a stochastic oscillator. The exponential moving averages used are 48 and 96 periods.
Because this strategy uses an M30 interval to trade, there is an automatic preview of the past 48 hours of the prevailing trend.
Using the standard 5,3,3 stochastics from MetaTrader MT4) provides the correct entry point.
Entering a position
The trader first determines the trend by referring to the MT4 Exponential Moving Averages. If the 96 period (slower) exponential moving average is below the 48 and both are below the price, a rising trend is defined and a long position contemplated.
The opposite is true for a downtrend.
The MT4 Stochastic Oscillator identifies the entry point. This amplifies the chance of a successful trade.
The Signal to open a position occurs at the point where, after identifying the trend with averages, the Stochastic intersects with the Signal line in the undervalued or revalue area depending on the sentiment on the M30.
These areas are identified at 80-100 (overvaluation) and 0-20 (undervaluation).
Once the signal is confirmed, the trader enters a trade at the time when the last candle on the M30 (in case of a buy signal in the upward trend) or the minimum (in the case of a downtrend) is reached.
The stop loss is below/above the minimum/maximum of the trend.
Once the prevailing trend restarts and new input signals appear, new positions are opened.
As a new position is opened, the stop loss is raised to defend the level of the original trade. In this way, the downside is protected and upside maximized.
Exiting the position
Every trading strategy and trader has a unique way of closing both profitable and loss-making positions. The Pyramid Investment Strategy does not place take profit orders since it limits the trader since he is following a trend.
Therefore, the Forex Pyramid Strategy provides a flexible and maximized profit with a certain stop loss.
Money management is extremely important to generate positive returns. This is a continuing theme.
The risk of bankruptcy calculation shouldn’t be far from the trader’s mind. When deciding to pyramid a trade, it needs to be understood that without adequate capital management it is impossible to generate profit.
Pain thresholds differ in traders as they do in life. Constantly analyzing the portfolio, performance and potential is vital. According to well-thumbed journals, the maximum investment per trade should not exceed 3% of capital and Pyramid Strategy Trading should reduce that to 1%.