What Is Pyramiding in Trading? – Trading Explained

What comes to mind when someone starts speaking about pyramiding? Do you know what is pyramiding in trading? Don’t worry; you don’t have to be a financial guru in order to understand pyramiding in trading. 

Let’s start from the beginning. Pyramiding is a trading strategy. To cut a long story short, it refers to a trading strategy where an investor keeps on adding more shares of a company every once in a while, increasing their margin inclined to the upward trend of the asset. The above-mentioned strategy is only utilized in the case of a bullish environment or when the asset shows strong upside potential.

Investors, as well as traders, follow the movement of the stock parallel to other significant factors and technical indicators and therefore continue investing in it until the time stock goes on to become more and more profitable. Without exaggeration, pyramiding is a risky strategy. So, inexperienced investors should try not to use the above-mentioned strategy.

What is pyramiding in trading?

So,  Let’s find out!

Investors can choose from several trading strategies. What’s interesting, some trading strategies are quite conservative. Such strategies are less risky. However, other strategies can be quite risky, including pyramiding;

As stated above, pyramiding isn’t for everyone as it is a risky trading strategy. Inexperienced traders should try to select less-risky strategies. 

Why is pyramiding so risky? 

The above-mentioned strategy works for large trends. Moreover, the strategy only works when investors enter the position early enough. Moreover, the strategy mentioned above requires the use of leverage or borrowed capital. 

Pyramiding vs. pyramid schemes 

Once again, pyramiding in trading is a risky endeavor. However, it is a legal trading strategy. Unfortunately, people who aren’t familiar with pyramiding confuse it with pyramid schemes.

It is worth mentioning that pyramid schemes are illegal. People should understand the difference between pyramiding and pyramid schemes.

Do you know how pyramid schemes work? 

To cut a long story short, they are fraudulent investment scams. They use the money they get from the new investors in order to pay returns to old investors.

Is it hard to recognize pyramid schemes? Hopefully, it is possible to identify many pyramid schemes. Instead of selling products or services, such schemes attract investors by promising them large returns. In most cases, scammers promise better returns compared to traditional investments.

In most cases, investors who invest early in pyramid schemes receive these promised returns thanks to new investors. However, the above-mentioned schemes cease to exist when scammers fail to recruit new investors. 

Rather than selling products or services, pyramid schemes lure investors by promising them large returns, usually higher than traditional investments on the market. 

The Securities and Exchange Commission is working hard in order to take measures against pyramid schemes. In recent years, the agency filed charges against a company called CKB. The company mentioned above persuaded investors from around the world to invest money. It focused on Asian-American communities in California and New York. 

According to the agency, the company mentioned above posed as a very profitable MLM company. It was selling online educational courses for children. Unsurprisingly, its only source of revenue was the money it procured from new investors. 

In conclusion, pyramiding in trading is a good option for investors who aren’t afraid of risk.