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Forex Pyramid Trading: Case Study

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The Forex pyramid trading strategy is the most lucrative strategy that I have come across thus far in my trading career. That’s saying a lot considering I’ve been trading since 2003.

Why is it so powerful, you ask?

Because it offers virtually unlimited profit potential without the increased risk of loss. And as we all know, the number one rule of any profitable trader is to maximize profits and minimize losses. The pyramid strategy allows you to do exactly that.

Showing you how to do it is one thing. Showing you an example of how I executed the strategy is another entirely. Which is why I wanted to take this time to show you an example of a trade that I recently pyramided.

But before we jump in it’s important that you understand the basics of pyramiding. This will allow you to better understand the concepts and methods once we get to the case study below.


Pyramiding Crash Course


The following is a crash course on how to pyramid. This will only cover the very basics of the strategy. See the full lesson for more detailed instruction.

As the name implies, pyramiding involves strategically adding to an existing position as a trade begins to move in your favor. The key word there is “strategically”. We aren’t just putting additional capital at risk and then crossing our fingers in hopes of making more money.

The following illustration shows a pyramided long position.

illustration of pyramid trading

Notice in the illustration above how we are adding to the initial buy order as the market retraces to former resistance and begins acting as new support.

The opposite applies to a short position, where we would add on a retest of a broken broken support level as it begins to act as new resistance.

Each buy order you see above is for an equal amount. So if you buy 40,000 units on the initial buy order, you would buy an additional 40,000 units on buy orders two and three.

In order to limit risk you want to move your stop loss up each time the market breaches another key resistance level. This ensures that the only risk you are exposed to is from the initial entry.

That’s the basic idea of pyramiding. But be sure to read the full lesson if anything mentioned above is unclear.


Case Study


The following is an actual trade that I took on AUDJPY. The setup along with each subsequent position taken was discussed inside the Daily Price Action member’s community.

In order for the case study to make sense, we will take a look at each individual level and formation that led to the initial setup. Once we have outlined the entire setup I will show you how I went about entering at various key levels.

The first and most prominent level on AUDJPY at the time was weekly trend line support as shown below.

AUDJPY trend line support on the weekly time frame

Notice that we have three well-defined touches off of this support level. Take special note of this trend line as it will play an important role later on.

Next up is trend line resistance that is best viewed on the 4 hour time frame. We will stay on this time frame for the remainder of the case study.

AUDJPY trend line resistance on the 4 hour chart

The chart above shows an obvious resistance level that had formed over two months and was therefore on a lot of people’s radar. This level will also become an important factor in the next few charts, so be sure to take note of it.

Next is the tipping point that led to the initial setup – a false break of the trend line we just saw on the 4 hour chart.

AUDJPY false break of trend line resistance

The chart above introduces two new factors. The first being the false break of trend line resistance and the second being the short-term trend line support.

Like most false breaks, the one that occurred above resulted in a swing in the opposite direction. In the case of AUDJPY that meant a move lower over the next few sessions.

Now that you have a firm understanding of some of the major levels involved, let’s get into the details of the initial trade setup along with subsequent levels of interest.

Pyramided short setup on AUDJPY

The chart above illustrates the exact setup and key levels I was viewing at the time it unfolded. Let’s walk through what is happening at each level and then we’ll get into how I went about adding to the initial short position.

After the bulls failed to hold former trend line resistance (new support), the pair formed a bearish pin bar that was respecting the old resistance level.

The bears took control shortly after, pushing the market below the next key support level. Upon retesting this level as new resistance the pair formed yet another bearish pin bar.

Approximately 24 hours later the market managed a close below the next key level of support. As we know, old support becomes new resistance. AUDJPY didn’t disappoint as the pair quickly dropped another 115 pips to eventually settle at weekly trend line support.

Now it’s time to take what you have just seen and apply my entry and stop loss levels. The chart below shows how I went about entering at various stages of the downtrend. Notice how I trailed my stop loss as the trade began moving into profit.

AUDJPY pyramided short position on the 4 hour time frame

The initial short entry came on a 50% retracement of the first bearish pin bar. I knew the first level of support was 90 pips away and by entering at 50% I managed to keep my stop loss tight at just 20 pips. This gave me a potential 4.5R right off the bat.

As soon as the next 4 hour candle closed below support I knew I had an opportunity to pyramid. The second bearish pin bar (sell order #2) gave me a great entry point. Using another 50% entry I now had a 30 pip stop loss.

But here’s the beauty of pyramiding. Because of my initial short position, which was now in profit, my worst case scenario was a 2R profit. This is because my first position would have netted me 3R minus the 1R loss giving me 2R. So as you can see I was already in a risk-free position.

We aren’t done yet. Soon after the market moved down and took out the next key level of support. This break led me to take a “blind” entry on a retest of the level as new resistance.

Why risk a blind entry, you ask? Because the worst case scenario at this point was a profit of 10.9R (9R on the first position, 2.9R on the second position and -1R on the third position).

Remember the weekly trend line support from earlier? This was my final profit target where I closed out all three positions for profit. The final numbers were as follows:

First position (+320 pips / 20 pip stop loss = 16R)

Second position (+230 pips / 30 pip stop loss = 7.6R)

Third position (100 pips / 45 pip stop loss = 2.2R)

The grand total was 650 pips from all three positions or more importantly, 25.8R. To put that in perspective, if you were risking just 2% per trade you would have made a massive 51.6% profit. Not bad for a sequence that took just two days from start to finish.

The best part about this entire sequence of trades is that my maximum exposure at any point in time was just 20 pips, or 2% if you prefer.


Final Words


As you can see, the Forex pyramid strategy can be extremely powerful if properly executed. The idea that you can achieve unlimited profit potential without the increased risk is what makes this trading strategy appealing to so many traders, myself included.

I would be remiss if I didn’t point out that every trade will not offer this kind of profit potential. In fact opportunities such as the one discussed above only come around once every few months. But at 20R+ you don’t need many of these a year to grow a trading account quickly.


Your Turn


Have you pyramided any trades lately?

Share your results or ask a question in the comments section below.

Leave a Comment:

12 comments
majid ali says

hi why you don’t add price and time how can we understand the support and resistance?

Reply
    Justin Bennett says

    Hi Majid,

    Because both of those are irrelevant. Feel free to go back and find the setup if you’d like. 🙂

    Cheers,

    Justin

    Reply
Mark Stewart says

Wow, awesome strategy Justin. Thanks for sharing. Will definitely be keeping my eyes open for these opportunities. How often do find the market gives you pyramid opportunities?

Reply
    Justin Bennett says

    Hi Mark,

    I’m glad you enjoyed it. 🙂

    I pyramid quite often if given the chance. But in terms of 10R+ opportunities, I have pyramided on AUDJPY, EURGBP and GBPNZD over the last 6 months, so about one every other month.

    Cheers,

    Justin

    Reply
$@h!l says

If instead of false break it formed a bullish pin bar rejecting trendline resistance + short term support will u trade that pin bar OR u will look for bearish signals only as it is downtrend…… 🙂

nAmAsTe 🙂 🙂

Reply
    Justin Bennett says

    Hi Sahil,

    If bullish price action had formed on the retest of former trend line resistance I most likely would have taken a long position.

    Cheers,

    Justin

    Reply
Nir says

Hey Justin!
do you use OCO to catch 50% entry or nose breaking entery?
Cheers

Reply
    Justin Bennett says

    Hi Nir, a simple limit order does the trick for those.

    Reply
Pablo says

Hi, Justin
Thanks for the lesson, I’ve learned a lot from you.
Do you pyramid only on the 4h time frame? Or is it possible to do it on the daily as well?

Reply
Quincy says

Hi Benneth, should pyramiding be done only on the Intraday time frame or Is it also feasible in the Daily Time frame? Thanks.

Reply
Mmapula says

Hi Justin, when pyramiding, do you use one stop loss for each entry? Or you use a different stop loss for each entry? Please help me understand this part

Reply
    Justin Bennett says

    Correct, I use the same stop loss location for all orders.

    Reply
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