Pyramiding is a commonly used money management technique and even popular trading literature promotes this way of managing positions as a low-risk money management technique. In our opinion, this is far from the truth and even though it sounds good in theory, traders who pyramid their positions quickly run into problems and we will see why.
What is pyramiding?
Let’s start at the beginning and take a look at what pyramiding is. Pyramiding means that you add to an existing position once price moves in your favor. A trader would then start with a small initial position and as the trade unfolds add to his winners and slowly build a larger position.
This sounds reasonable if you don’t look at the psychology of traders and connect it to the most common problems that exist in trading. Then, it becomes obvious quickly that pyramiding often makes things worse as we will see shortly.
