What is the Pyramid Trading Strategy?
The Pyramid Trading Strategy is a technique of trading that takes advantage of trending markets to add to winning trades in the direction of the trend. You do not have to place one huge trade in the direction of a trend if the trend is proving to be strong enough. You can place several small trades as the position grows, which may even prove to be more profitable than the single trade you would have made at first.
This strategy involves taking one trade in the direction of the trend, then adding units to the position as it grows. All this while, locking profits already acquired in previous trades.
As the price forms new highs and as the trend shows more strength, more units are called for. This means that every time that the trend shows strength to continue, you take another trade in the trend direction as the profits of the previous trade get locked and accumulated.
This adding of units and accumulation of profits continues until the trend proves not strong enough to continue and then you can exit the trade.
Looking back at the trades you have made, you will realize that more profits have been made than if only one trade was taken.
Why use the Pyramid Trading Strategy?
This strategy is so beneficial because you do not risk more at every addition of units. You still invest the same small amount as you lock profits. And in the event of loss in any subsequent trades in the setup, compensation will have been made by previous trades already.
Here also, you will reduce the tendency to take profits too early because you will need to test the trend to see whether it is strong or not. Whether the reversals that occur are simply pullbacks to pause the trend as it continues or real trend reversals.
When Can The Pyramid Trading Strategy be Applied Profitably?
Pyramiding can be done profitably on either Uptrends or Downtrends.
If on an uptrend, then you should take upward trades as you add units upwards. Conversely, if a downtrend, you take downward trades as you add units downwards.
One significant thing which must be emphasized in this strategy is, without a strong trend, Pyramiding would make no sense.
Using the Pyramid Trading Strategy to Make Money in Olymp Trade.
Now that you know what Pyramiding is, why can’t we proceed to how you can use it on your Olymp Trade charts to generate profits?
Pyramiding on Olymp Trade can be done in the following simple quick steps;
- Identify the trend direction.
- Identify an initial Support or Resistance level.
- Test the trend strength using the Support or Resistance.
- Wait for a tradable Buy or Sell signal and Enter a position in the trend direction.
- Wait until the price establishes a new Support or Resistance level.
- Test the trend Strength using the new Support and Resistance.
- Wait for a tradable Buy or Sell signal, Add one more unit in the trend direction, and Adjust Stop Loss orders.
- Continue repeating the steps as long as the trend remains strong.
- Exit the trade if the trend proves too weak to continue or reverses.
Let us get into the details of each step to see what really should be done in each.
1. Identify the trend direction.
First, identify if there is a trend on your chart. A trending chart is the most important factor for this strategy as pyramiding can only be done on trending markets.
Now that there is a trend, which direction is it facing?
Is it an Uptrend (heading upwards) or a Downtrend (heading downwards)?
If you can find a trending market and tell which direction it is facing, then it is time to move to the next step.
2. Identify an Initial Support or Resistance level.
If you are dealing with an Uptrend, you know that you are looking for an initial support level. On the contrary, if you are dealing with a Downtrend, you are looking for an initial Resistance level.
A support level in an Uptrend is a level in which the price tends not to break as it falls. The price may move up past the level, then try falling but not fall past it. Let the price test that level severally to ensure that it is a support level that cannot be broken.
Conversely, a Resistance level in a Downtrend is a level in which the price tends not to break as it rises. Initially, the price will fall past the level, then try rising but not make it past that resistance level. Let the price test that level severally to make sure that it is a real resistance level.
3. Test the Trend Strength Using the Support or Resistance.
Now that you have identified levels which the price tends not to break, it’s time to test how strong they are.
Your Support level on the uptrend needs to be tested if it is real or fake. Let the price test that level severally to ensure that it is a support level that cannot be broken. Let the price try several times to break that level downwards without success, only to reverse at every attempt.
Your resistance level is no exception – testing is paramount. Let the price test that levels severally to make sure that it is a real resistance level. The price should attempt severely to break the level upwards only to fail and reverse at every try.
If your Support or Resistance level has been confirmed real, then the trend is still strong and capable of continuing to grow higher or lower depending on its direction.
4. Wait for a tradable Buy or Sell Signal and Enter a Position.
Your support or resistance levels have been confirmed with certainty that the trend will keep going. You now need to wait for that signal to buy or sell to make your profits.
If it was your Support level which was confirmed real on an uptrend, then you are waiting for a signal to Buy.
Conversely, if it was your Resistance level which was confirmed real on a Downtrend, then you are waiting for a Sell signal.
Once you get that signal to Buy on an uptrend with a confirmed support level, enter a Buy position with your determined unit one trade size.
If the signal to Sell comes on a downtrend with a confirmed resistance level, enter a Sell position with the same one unit.
Remember to set your Stop loss just below your support level for a Buy position and just above your resistance level for a Sell position.
5. Wait until the price establishes a new Support or Resistance level.
Now that your trend strength was confirmed, we expect that such a trend will take you to the next level where the price will establish new Support or Resistance levels.
Were you on an uptrend and Buy position? You are waiting for the price to establish a new support level which will tend not to break downwards. If you were on a Downtrend and Sell position, then you are waiting for the price to establish a new resistance level which will tend not to break upwards.
6. Test the trend strength Using the new Support or Resistance.
Do you remember how we tested the trend strength the first time? That is exactly how you are going to test it here, using the new Support or Resistance levels. Let the price test those levels severally to ensure they won’t disappoint.
7. Wait for a tradable Buy or Sell signal, Add one more unit in the trend direction, and Adjust Stop Loss orders.
If your support or resistance levels were confirmed, it means that the trend is still strong enough to drive a significant price move. Now wait for a tradable signal and enter the market with one more unit.
Once you get that signal to Buy on an uptrend with a confirmed new support level, enter a Buy position adding one more unit trade size. If the signal to Sell comes on a downtrend with a confirmed new resistance level, enter a Sell position with one more unit.
Here, you set your Stop loss just below your new support level for a Buy position and just above your new resistance level for a Sell position.
You now need to adjust your Stop Loss order of the first trade to lock profits made in the first trade. Move the stop loss of the first trade from the initial level to set it at the same level as the Stop Loss of the new trade. That way, the profits of the first trade will not be at risk but your only risk will be the new trade – that is how profits are locked.
8. Continue repeating the steps as long as the trend remains strong.
Continue establishing new Support or Resistance levels, testing the trend strength, and adding one more unit at every confirmed trend strength.
Remember to adjust your Stop Loss order after every trade to lock profits. Move the Stop loss of the previous trade to the same level as the Stop Loss of the new trade.
9. Exit the trade if the trend proves too weak to continue or reverses.
Remember the one condition for pyramiding? As long as there is a strong trend you can trade.
Now, if the trend weakens to the extent of not being able to drive any more price moves in the same direction, we have no option but to quit.
You will realize that the trend is weakening if your Support or Resistance levels are not confirmed but are broken. The reverse will be visible so you don’t have to question that.
But look, by the time the trend is weakening, you might have accumulated so huge profits in the small trades which you would lock after each trade. That is the awesome thing about the Pyramid strategy of trading.
Need I say more after I have given you all the details about Pyramiding on Olymp Trade? You need to try it yourself and see the difference it makes on your profits.