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Using Aggressive Pyramiding to Go Beyond Margin Limits

April 25, 2016 by

When you read about pyramiding in Forex, the first association that sparks up is scaling in, that is increasing the size of profitable positions. I have written about this concept before and I am not very fond of scaling into normal trades.

Aggressive pyramiding is a different kind of beast. It is a way to increase the size of the position beyond the limits imposed by the initially available margin. As your starting position’s profit grows, so does your account’s equity and free margin. This allows you to add more lots to the original position. As a result, you are able to trade much bigger volumes than your account’s balance would have allowed. For as long as the position remains in profit, of course.

The obvious drawback of such position sizing method is that it is extremely risky. A big enough adversary move of the market will result in a margin call and stop-out of all your trades. A gap large enough will bring the account balance into negative territory. It is a very dangerous technique.

It is important to restate that Forex pyramiding is not a trading strategy. That is, it is not a set of entry and exit rules. Pyramid trading is a money management technique. You can use it either to scale into your trades or to open bigger trades than your margin would naturally allow you.

How to use it?

The aggressive pyramiding method consists of opening positions as big as your free margin allows right now until your target position size is reached. Ideally, it is done gradually, with every pip of favorable price movement. In reality, it would be a too tedious task (if done manually), so adding volume in one, two, or more additional trades may be a better choice.

For example, you want to open a long EUR/USD position of 3 standard lots. Your account balance is $1,000 and the leverage offered by your broker is 1:200. With EUR/USD at 1.2000, you will need $1,800 to open the planned position. And that is not including any margin to hold off the losses if market moves in the opposite direction.

With aggressive pyramiding, you can first buy 1.5 lots of EUR/USD using $900 leverage. Even if you broker has stop-out level at 100% (which is very rare), you will still have $100 margin to keep you safe against 6.6 pips of loss. If you are confident in the trade, it can work out quite well.

As the EUR/USD rate rises to 1.2060, you get a paper profit of 60 pips or $900. Now you have $1,000 free margin, which can be used to buy 1.5 more lots using $904.50 margin (1.2060 × 1.5 × 100,000 / 200). Now you have a long trade of 3 standard lots open at the average price of 1.2030 and $95.5 free margin available.

Mission accomplished. Of course, it only makes sense if your trade set-up is pointing at a take-profit much higher than 1.2060. On the one hand it could all end like this:

Aggressive Pyramiding Example That Went Really Well

On the other hand EUR/USD could go the other way and erase both of your positions pretty quickly. With high stop-out level at your broker it may look like this:

Aggressive Pyramiding Example with Poor Results

You should be aware that unless your broker uses a high stop-out level value (and most use 10%-40% nowadays), you are basically trading without stop-loss — almost all your account balance is the potential loss. Of course, you are wondering what is the point in using such a technique?

Why?

There are three quite substantial reasons for using aggressive pyramiding to max out the margin for your trades:

  • If you want a position of a particular size and your account balance is low, but you cannot deposit more money right now. The reasons for not being able to deposit can be numerous: from deposit process taking too long (e.g. the broker is known for KYC/AML checks lasting for several days) to money being tied up in something else to experiencing troubles with your payment system.
  • Sometimes, you just do not want to deposit more with this particular broker. For example, you could be planning to close the account soon, or the broker switches accounts with higher balance to some other type and conditions, or whatever else.
  • When a once-in-a-lifetime opportunity presents itself, you want to be all in on it and sometimes even more than that. Aggressive pyramiding is just the way to be in such a case. For example, you have some inside information (really?) or you believe that you know the outcome of some interest rate decision and it is different from what the markets expect, etc.

Of course, you do not need to be doing aggressive pyramiding each time one of the above-mentioned reasons arise. In fact, you have to be wary of the colossal risk this trading method involves and should avoid it in almost any case unless your well-weighted consideration tells you otherwise.

Opinion

I, personally, do not like this technique. Frankly, aggressive pyramiding goes against nearly every personal rule of trading I have. At the same time, I admit that it has its place in the trader’s toolbox (see the reasons listed above). I even used it a few times, though my aggressive pyramiding was not so aggressive after all because I also tried to keep some stop-loss active and went in with more volume only when the floating profit increased sufficiently to cover both new required margin and potential loss down to my SL. And how about you?

Have you ever used pyramiding to open extremely big positions?

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If you have some ideas and suggestions as to how pyramiding could be used safely in Forex trading, please let everyone know using the commentary form below.

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