If you’ve read the trend correctly and want to add to your position, how should you do it? Going in heavy right away and adding until you’re fully loaded with unrealized gains is a sure way to land on the list of
liquidation cases. The right approach is called pyramiding.
【Principle】Add less each time than you did the time before. For example, start with 30%, then add 20% after the first confirmed pullback,
After another confirmation, add 10%. The higher the price goes, the smaller your position should be. Keep most of your cost basis low so you can withstand a pullback.
【Why the reverse is dangerous】An inverted pyramid (a small position at the bottom, adding more and more at the top) means your
average cost is concentrated at the top. Even a slight pullback can turn profits into losses. Once you lose your nerve, all your trading decisions go off track.
Many people don't lose money by getting the direction wrong; they lose because they add to positions in the wrong sequence.
【Three Ironclad Rules】1. Add only to winning positions. For losing positions, reduce—never add (don't average down!);
2. Each time you add, move your overall stop-loss up accordingly; 3. Before adding, ask yourself: If this were entirely new money, would I still be willing to open a position at this price?
If you're unsure, don't add.
What do you think? Share your experience in the comments.