Pyramiding Your Trades

In trading financial markets one of the least understood profit
strategies is the art of pyramiding. Plain and simple, this is
the science of adding to your existing trading position in the
hope of achieving additional trading profits over what you might
otherwise have made.

This is simple enough in theory, but it's filled with pitfalls.
In fact, this one area of trading alone is probably the cause of
as much despair as almost anything else in day trading or even
longer term speculation in the markets. Most people outside of
elite professional circles are ignorant of the finer points of
pyramiding. In the present discussion, we'll highlight the
dangers, but also give you some key ideas on how to pyramid properly.

The first requirement for a pyramid is that your trade actually
be profitable at the time you add to it. This may sound pretty
obvious, but you would be astonished as to how many traders
violate this most basic of principles. Many traders and investors
will happily add to LOSING positions! There are various quaint
rationales for this; such as the idea that by doing so, you are
somehow “averaging” your entry price and making the overall trade
thereby cheaper.

OK. Let's cut through the crap here, shall we?…

Here is an inviolable trading principle: You do NOT add to a
losing position! Never!

Frankly, it doesn't matter what you may wish to call it, a losing
position is a losing position. It has certainly not proven
itself, and hence there is absolutely no reason to believe that a
loser will turn into a winner.

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