How to pyramid properly?

The wrong way is to start with one contract and then add a second contract as it goes in your favor, then add two more contracts, then add three, and so on. The problem with this is that the trade becomes top-heavy as most of the contracts are done at higher prices. If the market does a quick turnaround, it can be costly. When a position is top-heavy, the market only has to retrace a portion of what it has moved to erase all the profits made in the initial move.

The proper way to pyramid is to have the most contracts at the bottom and then, as the trade begins to work, to add fewer and fewer. Thus, if you had started with ten contracts, you’d add seven, and later four, two, and one. This way, when the market turns, you don’t risk nearly as much and can keep most of the early gains.


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