Ever since I wrote about the Forex pyramid strategy, I have received a lot of interest in it from both members and non-members alike. This is especially true for members as they are more “in the know” about my trading activities than non-members.
When I wrote that lesson, the idea of adding to a winning position was a new concept for many, and with any new concept or technique come questions. Since that lesson was published I have received hundreds of questions on the topic of pyramiding.
For this reason, I decided to highlight a recent trade of mine where I used the pyramiding strategy to pull off a handsome profit. My hope is that by showing you my exact thought process throughout the trade, you will gain a better understanding of what it takes to pyramid one of your own trades.
Let’s get started!
I do realize that the title of this lesson is extreme, especially in a world where we are told that if it’s too good to be true, it probably is (which I don’t agree with, by the way).
At any rate, I want to point something out before we begin…
While I would love for 108% profit, or 54R, to be my “run of the mill” trade, that is far from the truth. I do in fact average much higher than 2R, but the truth is that 54R is my largest gain to date from a single trade idea.
So before the comments start flying accusing me of misleading people about what is possible in the Forex market, just know that this was by no means an average trade for me either. It was one of those opportunities that might come along once every few years. Even then you have to know what you are doing in order to capitalize on the opportunity.
Point is, the gains discussed here are by no means a representation of what is considered “average” in the Forex market.
One last thing before we begin. Most of my trades last for a week or maybe a few weeks at a time. So a four-month position is also not the norm, it just happened to unfold that way with the trade you are about to see.
With the disclaimer out of the way, let’s dig in!
First and foremost I want to discuss what tipped me off to the initial trade idea. This is what established the idea that I was likely looking at a multi-year top for NZDJPY.
The weekly chart below tells the story.
The chart above may not mean much to some and you may be wondering how this indicated the likelihood of a major top in 2014. One thing you have to remember is that I was viewing this chart back in February, when that massive decline had not yet formed.
So what was it exactly that tipped me off to this idea?
Take a look at how the two most important Fibonacci levels, the 50.0 and 61.8, line up perfectly with major highs and lows from several years ago. Of course I do realize that 50.0 is not a true number in the Fibonacci sequence, but it is still considered one of the most important levels nonetheless.
Also note that the starting and ending point I used for the Fibonacci tool is a major swing low and swing high. This was nearly a four year period between the low and high shown in the chart above, so the significance of the 50.0 and 61.8 levels lining up as perfectly as they did was fairly telling that a major top had likely formed.
Here is a closer look at how well the 50.0 and 61.8 line up with major swing highs and lows from several years ago.
So what did this tell me, exactly?
It told me that the high in 2014 was likely a major top. Think about it this way, if the pair had continued to rally higher in 2015 and taken out the 2014 high, the Fibonacci levels would no longer line up as well as they did in the chart above.
At this point you may be wondering – wait a minute, was that really enough for you to enter short?
Not a chance.
However it did give me enough to approach NZDJPY with a bearish bias starting in February of 2015. So from then on I was only looking for selling opportunities.
A short while after doing the analysis we just discussed, a favorable setup came along in the form of a bearish pin bar.
The pin bar on the chart above formed on the daily time frame after the pair failed to rally above a recent high that had been put in four weeks prior to this setup forming.
This was enough for me to enter short on a close of the pin bar with a 70 pip stop loss.
What was my target for this trade?
We will get to that shortly. But given the fact that I now had a good idea to think that 2014 was a major top and the pair failed to rally past a recent swing high, the odds were stacked in my favor for a large correction after a long three-year rally.
To put things in perspective, here is where the bearish pin bar had formed.
Of course at the time I had no idea that the pair would fall off a cliff in the coming months. But again, the clues I had gathered thus far pointed to the probability of a much lower NZDJPY, and that was enough for me to stay short.
The next section will illustrate why I decided to hold on to this trade for so long.
At this point, I’m in the short position based on the bearish pin bar we just saw. I also have a strong indication that the pair recently carved out a major top due to the Fibonacci levels we discussed at the beginning of the lesson.
Now for the really fun part – adding to the short position.
But before we dive in I want to point something out. If you have followed me for any length of time, you know that I love to trade the head and shoulders pattern. It’s one of my favorite patterns to trade due to the immense gains that can be had when traded properly.
You may have noticed from the first chart I posted in this lesson that NZDJPY had formed a head and shoulders pattern on the weekly chart. In fact here is my commentary from May 6th where I mentioned this larger pattern that was unfolding. Although I had actually been talking about the 2014 top inside the DPA member’s area since February of this year.
Speaking of that commentary from May 6th, the key level mentioned in my chart at the bottom of that commentary turned out to be the tipping point for NZDJPY. The truth is the pair only managed to gain another 15 pips above 89.95 before plummeting more than 1,700 pips over the course of the next few months.
Here is a better view of the reversal pattern.
Because I entered as the right shoulder of the pattern was topping, the pattern itself was nowhere near confirmed. But remember, Fibonacci was telling me that the head of this pattern was a major top, possibly something that would stand for years to come.
So with that in mind, I was no longer interested in a 3R or 4R trade. I had my sights set much higher, or should I say lower in the case of NZDJPY?
Was it a gamble to hold it this long and not book profits?
Not at all due to what we have already discussed. Also keep in mind that my risk was controlled and the risk to reward ratio was more than favorable.
Just two weeks after my initial short entry I was in profit by 130 pips so I started to trail my stop loss. At this point I was in a risk-free trade with a profit potential of 1,680 pips.
No, that is not a typo.
The reason for the huge profit potential had to do with the four-month head and shoulders pattern we just discussed. As we know, the measured objective for such a pattern is found by measuring the height of the pattern in pips and then projecting that same distance from the breakout point.
Here is how that looked for the NZDJPY pattern.
The negative to a position like this (if there is one), is that I knew I would be holding it for a very long time, meaning that part of my trading capital would be tied up for months. But as long as things were progressing as outlined above, I was perfectly okay holding it for the long-term.
Okay, now let’s talk about how I was able to leverage this trade idea into a profit of 54R…
The following chart shows both bearish pin bars.
At this point, I have two short positions on and I have locked in some profit with a trailed stop loss. Even if the market had retraced on me and the second position turned out to be a loss, the first position would have netted 165 pips.
So the worst case scenario from here on out is that I make money.
The third entry signal was much more significant in the context of the larger reversal pattern we discussed previously. At this point the market had broken below the neckline of the pattern and retested it as new resistance.
Here is how the third entry looked:
The fourth and final position came after the market had moved into a sideways consolidation pattern. I typically stay away from entering in these conditions, however due to the recent break of the neckline combined with yet another bearish pin bar at resistance, I decided to pull the trigger.
Keep in mind that at this point my worst case scenario was +18R or 36% profit if risking 2%.
This fourth entry was made on July 29th. Less than a month later, on August 24th, the Yen crosses made a significant move lower. NZDJPY was one of those crosses and ended up triggering my take profit at 75.00, which was the measured objective of the four-month head and shoulders pattern.
Now that you have seen my thought process from start to finish, let’s take a look at the final results.
The first position from the initial bearish pin bar ended up producing a profit of 1,680 pips. Based on the 70 pip stop loss, it amounted to 24R. In other words, a 2% risk on this one trade would have banked a profit of 48%.
While this is by no means a small return, by simply adding to the position as it moved in my favor I was able to more than double this number.
The second bearish pin bar that formed just three weeks after the initial signal went on to produce 1,420 pips. Taking the 100 pip stop loss into account, it returned 14.2R, or 28.4% profit if risking 2%.
So now we are up to 38.2R based on the first two positions. But we still have two more to go.
Fast forward five weeks later and the pair had broken below the neckline which confirmed the head and shoulders reversal. At this point, it was “game on” in terms of the final target. This confirmation gave my bearish view much more credibility and gave me the confidence to add a third and fourth position.
The third position was added on a retest of the neckline and would eventually go on to produce 1,025 pips. My stop loss for the entire position was now 120 pips away as I wanted to give the market some room to breathe. This trade alone added another 8.5R to the total.
Last but not least was the bearish pin bar that formed at the range high of 83.00, one month after the pair confirmed the head and shoulders pattern. This particular position was worth 7.5R, bringing the total to 54.2R.
The truth is I had intended to extend this already massive short position on a daily close below 80.45. The plan was to add a fifth position on a retest of this level as new resistance.
But as you can see, the market had other plans, and instead decided to plummet 860 pips in a single day on August 24th, hitting my target at 75.00. Of course, I certainly can’t complain about a 54.2R profit, even if it did take four months to materialize.
So let’s talk profit…
If you had risked just 2% on your initial trade and risked the same amount on each subsequent trade, you would have ended up with a 108% profit, essentially doubling your account.
The best part about all of this, which is the beautiful thing about pyramiding, is that your maximum risk throughout the entire trade was just 2% of your account balance.
The only real downside is that it took four months to play out. That said, how many fund managers do you know who can return 108% in an entire calendar year, much less four months?
The power of pyramiding in the Forex market, or any market for that matter, should not be ignored. While it takes some practice and getting used to, the results are well worth it and speak for themselves.
A common hurdle for many attempting to pyramid is knowing when to add to a position versus when to shoot for a simple 3R trade.
Although it is hard to come up with a single, definitive answer to this question, a big part of it has to do with the larger picture that is unfolding.
In the case of NZDJPY, I had the potential to ride a short position into what would ultimately become a reversal pattern worth more than 1,000 pips. While I didn’t know that the pattern would confirm, I had a very big clue that pointed to the probability of a large correction.
At the end of the day, the broader picture on the weekly chart for NZDJPY allowed me to turn what might have been a 3R trade into a profit that was 18 times larger.
Lastly, and as mentioned at the beginning of the lesson, this was my largest profit from a single trade to date. Having traded the markets since 2002 and the Forex market specifically since 2007, that’s a significant milestone.
Please keep that in mind as you digest what you have just read and begin to reflect on your own trading performance.
What is your largest pyramided trade to date? Did this lesson help you to better understand how to pyramid in a trending market?
Leave your comment, question or general feedback in the comments section below. I look forward to hearing from you.