If you’ve correctly read the trend and want to add to your position, how should you do it? Going in heavy right away and adding until you’re fully invested with unrealized gains is a recipe for landing on the liquidation list.
A common mistake. The right approach is called pyramid scaling.
【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 additions should be, keeping the bulk of your cost basis low so you can weather 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 a profit into a loss. Once you lose your nerve, all your trades go off the rails.
Many people lose money not because they got the direction wrong, but because they added to their positions in the wrong order.
【Three hard-and-fast rules】1. Only add to winning positions; reduce losing positions, never add to them (don't average down!);
2. Every time you add to a position, move your overall stop-loss level up accordingly; 3. Before adding, ask yourself: If this were a brand-new
trade, 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 experiences in the comments.