A tactic in which new deals are added to the current ones inputs that coincide in the direction of open positions are called position averaging. The concept mainly refers to the build-up of unprofitable transactions, while the increase in a position that has a current profit is called a pyramid.
Pyramid of deals
A pyramid is an attempt to increase the potential of the current profitable position by reinvesting or increasing the share of the deposit allocated for trading.
The main rule of pyramiding is that the stop loss of the first position should be at breakeven or higher, and the amount of capital allocated for newly opened transactions should not exceed the rules.
Sometimes traders resort to the general breakeven tactic for the total position (the profit on the previous position overlaps or is equal to stop loss new orders). In this case, the risks of a new entry may be overestimated.
Pyramiding is used in long-term and medium-term strategies, mainly by investors or funds whose systems are configured for fundamental definition market trends. The prerequisite for using the pyramid strategy is the constant availability of funds for targeted placement on the stock financial and commodity markets.
The prerequisite for averaging is an attempt to reduce the loss on the current position or "correct" the entry price by increasing trading lot.
If the total amount of funds used for trading exceeds the amount accepted in risk management, then such a tactic leads to the ruin of the trader.
Averaging tactics are most often used within the framework of strategies – "grid" (grid). A large number of orders are postponed in both directions with a certain step, which are opened when the price fluctuates in any direction. The closing algorithm assumes profit-taking when the price returns to its original values. Instead of limiting losses, closing at the average price is used.
Despite the presence of risk management in the strategy, any trend movement leads to a loss, and the profit brings flat. There is no clear proportion of the ratio of directed market movements and flats. A volatile flat is also dangerous for the strategy, as is a trend.
The lack of forecasting of market movements in the strategy leads to the inevitable ruin of the trader, despite the risk management.
Each a pending order , being drawn into the market, increases the total loss, which is not comparable to the possible fixed profit. According to the rules of the strategy, the profit falls on the first opening of the transaction. Due to the fact that the deposit is divided into many orders, the size of the first orders is too small.