The forex compounding strategy is a simple yet effective way to grow your forex portfolio, no matter what strategy you choose to use while trading. As a forex trader, the main objective is to make a consistent and stable structure that brings good returns on investments.
As a forex trader, you have to understand that the forex compounding strategy is a highly effective way to increase your earnings and grow your account. It entails adding whatever profit you make into your investment portfolio. This allows your forex account to grow at an exponentially fast rate rather than making the same investment every time, which leads to linear and slow growth.
What is the essence of the Forex Compounding Strategy?
Compounding is great because it allows you the opportunity to grow fast, as every single amount you have in your forex account is tagged as an investment. However, if not done properly, you will find yourself starting from scratch every time you lose money. This is where the creation of a strategy comes in handy, as we have noted.
We are therefore going to highlight a few ways to create a structure that will not only earn you profit, ensuring exponential returns, but also ensure that you do not lose all your earnings in the process. Even though you make a profit when compounding your trades, you have to take the time to understand how your profits were made so you can make it a systematic way of constantly making a profit.
Talking about compounding, let’s look at a trading method or strategy that will not work. If, for every time you are losing a trade, you add on the next trade to cover for the previous loss with a bigger investment, it will definitely not help with compounding. For compounding, you should bank on the pips; you can take it over time compared to playing the waiting game and invest more any time you have to cover for losses.
How does compounding work?
Forex compounding is a reading method best for strategies that can eventually take a positive pip, irrespective of the position size you are putting on the trade. If you set a one standard trade lot overtime, you will certainly be profitable at the end of the trade period. The only reason why you might need to change the position to cover for other losses is when you are at a momentary financially profitable position that you know will not be profitable when it comes to measuring total pips gain. Once we understand how to net total pips, there is a method we can use for compounding.
Getting positive pips
Getting positive pips is a significant step to compounding your forex income. The next thing to do to make the compounding process a success is to make sure that the rate at which you succeed in your trades is above 50%. You need to have successful trades from entry to exit rate for more than half the time you trade. If you can achieve this success rate, you can use the forex market leverage to your advantage.
However, like all trading methods, you have to be systematic and intelligent, and not take unnecessary risks that will waste all your efforts. When you master the ability to get positive pips and a profit margin above 50%, then you should be able to shift your workflow to manage your trades and actions based on percentages.
There are different ways to measure percentage using the total portfolio value according to the two ending points. The first is from the perspective of risk, and the other is from the expectation of profit, and the choice on which method to use depends on you.
Sharp vertical gain curve on profit
Looking at this, let’s say that you want to risk about 1% from the account value for each trade, which is a percentage you have to take into consideration based on risk. You can set that you want to profit 2% for every trade you make. This means you are trying to work out your tactics from the other end of the profit. You must be trading using your market analysis strategy, which determines the price levels you would put at your entry, your targets, and your targets and maximum risk.
Once you have all this information alongside the percentage, you can re-calculate the size of each position. Doing this, you will earn a fixed percentage for each win, rather than taking pips on a static position. You will also get a Return on Investment (ROI) on each trade, which can be determined as capital to be used in new trades using this same technique.
Descending shallow curve on loss
Apart from the capitalisation side of working in percentages, you also have the defensive side. For every time you lose a trade, your account will reduce to a certain point or percentage, and for bad times where you experience multiple failed trades, every trade you take preceding a loss should have a lower position size that is risked and should be weighted less. The end result is a growth curve looking exponential, while your losing curve will be a steep descending rate of loss.
If you have an accuracy rate of over 50%, with the rate totalling your net pips, and you start sizing your position from your current balance based on percentage, you will be relying on previous wins, which will get you an exponential growth rate. If you have a higher success rate than 50%, you can do more when it comes to compounding your forex account.
Compounding your swing position
When we talk about forex compounding strategies, it does not necessarily have to be only from trade to trade. You can also manage compounding by running long-term trades where you hold your positions, and you know that your trades have reached key price levels that are confirmed not to return. You can commit part of your floating profits to increase your position, rather than once price has completed retracement and established that it’s going to work for the next coming wave, rather than increasing your stop loss. You can compound your profit on a non-realised position to increase your profit on that set trade.
How to profit even with a success rate of less than 50%
This is the technical side of the business, which demands more technicality and analysis. Once you pay attention to some factors in this scenario, it is still possible to compound your forex account even with a success rate of less than 50%. Instead of looking at trades and how successful they are, you should look at the sequence of successful trades. If you bring a sequence of trades into profit, once you can create a profitable sequence that helps you gain net pips, this will be considered as if it were to be a single position. Then you have to combine the sequence to reach your ROI goal. This means that, instead of one trade, you should see the bigger picture, considering a number of trades as part of a sequence until it becomes a profitable one.
On the other hand, when you work in a sequence and change position size, you should know how much you can risk in one full sequence. This means that it is fundamental that you have a way of defining what you call a losing sequence. From a perspective that is defensive, you can keep on going and still not admit to yourself that you are on a losing streak, so you need to have a definition for what you term as a losing streak. Once you have this knowledge as strong guidance, you can then have a definition of a winning sequence. This strategy of compounding demands discipline, and it is not something you can do if you cannot enforce these definitions on yourself.
Bottom line
To round things up, the forex compounding strategy is a technique that helps you manage the money you have made. This technique allows you to take the money you have made in profit and make heavier investments, increasing your income statistics faster than making the same sets of trades over time. Your trading account capital will soar through the roof using the method of compounding. This takes time, skills, and effort to master the technicality of increasing your income. If you learn and understand this technique, then you are on your way to a profitable standard of living.
This article has been put together to provide good information on the subject matter. It is, therefore, to be used for educational purposes only. If for any reason, you want to make any investment plan based on this information, it is imperative that you conduct your findings based on your personal situation. For more financial advice, you can take it upon yourself to run the information you have received in this article by your financial advisor to make sure it suits what you want to do.