Pyramiding Your Way to Profits

Pyramiding is an investment strategy that involves putting more money into an asset that is doing well in order to increase the amount of profits that are possible. With this strategy, you can take a low risk approach to improving your results. Pyramiding is a strategy that is used by traders who wish to increase the amount of profit on a trade. For example, let's say that you have invested a certain amount of money in a stock and it is performing well. You look at your price chart and the price of the stock has broken through the previous high and continues to go even higher. If you want to pyramid your position, you will take additional money from your account and buy more of the same stock. This will allow you to take even more profits from the continued increase in the price of the stock. You are essentially increasing your position in the same trade.

Why it is Effective

The idea behind this investment strategy is that you will be adding money into investments that are already performing well. This eliminates a lot of the guesswork that comes with choosing from thousands of available stocks. Instead of picking an unknown stock that you are not familiar with, you are just putting more money into something that you know is performing well. The mantra "stick with what works" helps explain why this strategy can be effective.

Putting it Into Practice

If you utilize this strategy effectively, you can essentially get additional profits without taking on a lot of extra risk. For example, let's say that you are already in a profitable trade. You decide that you want to increase the amount of profits that you can make from this trade. At that point, you can purchase additional shares of the stock and add to your position. However, with this new batch of stock, you will not be placing your stoploss at the same level that your other order is.

Instead, you will place the stoploss close to the entry point of your new order, with a little bit of room for movement. If the stock decreases in value, you are not really out a lot of additional money. However, if the stock increases in value, you can make quite more than you would have been able to if you would have only held onto the original amount.

Problems

Even though this investment strategy can be very beneficial, there are a few potential drawbacks that you should know about. One of the biggest drawbacks that you may have to deal with is if there are large gaps between prices of securities when the market opens and closes. If you are in a winning position with your new trade and a large gap occurs overnight, it could cause result in hitting your stoploss and you would be out of the trade quickly. 

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