What is pyramiding? Investopedia says:

“A method of increasing a position size by using unrealized profits from successful trades to increase margin.”

So what does this mean?

When you take a look at the examples on how to trade Point and Figure Charts you will see that I opened new positions along the way down or up the trend. I have made some profits with my former positions, which I have not yet realized – but I could in any second, if I would like to! So I treat this unrealized profits like as if I already had them on my account.

Pro and contra

The advantages is, that you can make some huge gains. Instead of only making 1.000 pips with one position, I make 1.000 pips with the first, another 600 with the second and maybe some 400 pips more with my last position. Instead of having made only $10.000 (1 lot each position), I have doubled my earning.

But pyramiding is a double-edged sword. The problem is, when you already made some nice profits and open a new position that goes against you, you can loose all the profits you made so far. It’s even possible that you end up with not only having your profits gone, but also making a loss.

Believe me, that it’s not nice to see your profit going from $4.500 back to $1.500 and being stopped out then, when you could have made tripple the amount of money. You can say “$1.500 is still a great result” - and you’re right. But that’s the psychology of trading:

You’re happier if you could turn a big loss into a small one, than you are when you have only made a small win instead of a big one.

How to reduce the risk

Pyramiding works best in trending markets. If we have the situation that market moves in a consolidation zone, we better do not use pyramiding.

I try not to open new positions if the price is to close to my last opened position. Best situation would be, when you have already locked your profits with a stop loss. Then it’s not possible to eat up all of your profits if the last trade is a losing one. If the price of the last positions is to close and the market moves against your trades, then your profits will turn into losses in no time.

Another recommandation is to reduce the size of each new position. For example, when your first order has a size of 2 lots, then your next one could be between 1 and 1.5 lots. The third position 0.75 – 1.0 lots and the next ones 0.5 lots each. By doing this, you don’t make as much money as you could have made – but you also won’t lose as much money as you would, if price is moving against your favor.

The key to success is – as always – applying a strict risk and money management! Use a stop loss to back up profits you have already made and always know how much you’re risking in every trade.