How You Can Trade Multiple Positions by Applying Money Management
To be a highly successful trader, novice traders must have a good trading plan. Trading multiple positions can be difficult without proper money management. Usually, traders will develop their own techniques of money management, based on their financial positions, trading styles, etc. One of the most popular strategies in money management is the Pyramid strategy, using which traders can effectively multiply Forex gains, with a relatively low risk.
Pyramiding is a strategy in which traders take advantage of high performing assets, by adding new positions at upper levels or doing what is called ‘averaging up.’ Traders trade multiple positions, after an increase in assets, with an intent to maximize profits. Averaging in a falling market is a very dangerous strategy, as the assets are getting lost, rather than being acquired. Pyramiding provides opportunities for traders to increase their positions, as the market goes up and at the same time, reduces their risk exposure.
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For example, Mr. X sees an opportunity in the USD/JPY pair and wants to trade with a $10,000 amount by taking a long position at 95.00. He also decides to take a stop loss of 2%, just in case the market goes against him. Rather than putting all of his money in at once, he decides to trade with $5000 and after an hour, when the trade goes in his favor, he invests an additional $3000 at 95.62. Let’s say the pair rises sharply from thereon, he invests a further $2000 at 97.65, closing the trade at 99 with a profit of 400 pips.
1. Long Positions – In an example of the US Dollar and Swiss Franc (USD/CHF), where traders played with multiple positions and adding new positions at each successive move to new highs:
In this example, the main entry points at which traders make long positions are; 1.0562, 1.0801, and 1.0916. Here, the exit point is 1.1567, at which all the long positions are closed.
2. Short Positions- Like with the long pyramiding strategy, traders can also hedge their risk using a short pyramiding strategy. The only difference will be that the strategy is applied when the market is in a downtrend.
This is again an example of the US Dollar and Swiss Franc (USD/CHF), where traders play with multiple positions and add new positions, at each successive move to new lows. In this example, the main entry points at which trader makes short positions are; 1.1700, 1.1673, and 1.1408. Here, the exit point is 1.10901 at which all the short positions are squared off.
Trading multiple positions without a good trading plan is very difficult but traders can make this easy, with the help of the Pyramiding strategy through which, traders can add more positions to the trade, whilst lowering their risk exposure at the same time.