I’ve been trading Forex for less than a year. So far it’s been primarily demo accounts but I have tried a couple of live accounts through a couple of different brokers.
Thus far, net gain/loss = About -$250USD
At this point you may be wondering, “Why is this whackjob asking about compounding profits when it’s clear he’s never had any real experience with profits?” Well, bear with me.
Here’s the scenario:
Novice trader has backtested and forward tested a commercialized EA which is advertised as able to generate about 7% - 15% monthly with minimal drawdowns.
Novice trader opens an account with enough capital to handle drawdowns of said EA. Let’s say in this case a $1000 account will suffice.
Novice trader goes live! Novice trader ends the first month with $50 profit (or 5%).
Novice trader decides that instead of withdrawing the profit, he (or she) would like to begin month two with $1050 starting capital instead of the $1000 he (or she) started with last month.
Novice trader repeats the process for 10 years and becomes rich.
Okay, now with the exception of step #5, this is the scenario I’ve been pondering. I may be naive, and in all honesty, no I haven’t done any serious back or forward testing of a commercialized EA. This is hypothetical.
THE QUESTION: Is it advisable to attempt to compound profits gained each month? Does this work? Or is this a pipe dream made up by all these EA makers out there to sucker us poor ignorant newbie traders into shelling out $100-$200?
Feedback would be appreciated. There may be a similar thread out there on this, but I couldn’t find one (because I couldn’t get the search button to work).
While compounding is great, I don’t think you can apply your scenario to an actual account. If you made 5% in month 1, you would not be able to trade 1.05 lots for month 2 (or can you? I am new to this so am not sure what the minimum lot size is. I believe it’s based on the broker you use). I may be wrong, but I’ve been pondering this as well and it seems to me that the minimum would be 10% for 1.10 lots, but I wouldn’t consider anything relevant under 2, i.e. you’ve doubled your initial deposit and are now trading 2 lots instead of 1. (What a run-on sentence) Anything under this, for me, would simply allow more draw-down cushioning.
Beside the increasing stress to your psyche, just do the math…
When you initially have 1000 USD in your account and you make 10% a month, then your account grows to a 1100 USD at the end of the month.
Lets now assume, that you watch your account for one year with 10% growth per month.
With compounding you get a profit account size of
Vc(12) = (1+0.1)^12*1000$ ≈ 3.138,48 USD
If you take your 100 USD profit out of the account each month, you get
Vi(12) = 1000$ + 120.11000$ = 2.200 USD
These formulas should also give you a feeling for the different behavior of the account equity over time. You can try to modify the parameters and draw the development of the account to get an even better idea.
NOVICE TRADER IS DELUSIONAL AND IS BEING
TOTALLY UNREALISTIC.
What makes you think that you can stomach the
losses that will come and stay with it for 10 years?
If you do make it, always calculate risk on your
current available equity. Follow a strict money
management risk per trade. Pick no more than
3 currency pairs to trade, never hedge, and
never have more than 3 concurrent trades open
at once, and risk no more than total of 10%.
And what goes well for 2 months could go horrid
next 2 month. This is an up and down game of
gut checking that truly is not predictable in any
way despite all the technical analysis loving
loons in the FX arena. Only wise thing you can
do is always follow proper risk procedures, do not
get greedy, do not increase risk daily rather do it
monthly or quarterly based on your current equity,
not balance, and continue to learn all you can.
And while FX trading is incredibly complex, try to
keep it simple. Don’t get caught up with any
overly technical indicator, simple trend candlesticks
work the best. And best advice, learn to take
quick profits meaning your take profit goals on
per trade basis should be no more than 30 PIPs.
Not 200 PIPs per trade like some people advocate.
Learn to take quick 20-30 PIP profits per trade.
JonnyFX, why does one necessarily have to take 20-30 pip profits only to be successful? Why can’t someone trade more than 3 pairs simultaneously and be successful? If that’s your trading style, great. But there are as many way to trade as there are people to trade them. I am currently testing a system that breaks almost every “rule” you listed and I’m fine with it. I have up days and down days. I am trading 8 pairs at a time (not that every pair is active necessarily) and my T/P and S/L have been as high as 230 pips. I understand the psychology of watching a large draw down, but that is part of what testing a trial account is for. If the long-term testing nets positive, I can have confidence that the same will be true when I’m trading live…even when I’m facing my 5th consecutive loss.
I do agree that it’s not realistic to think that you’re going to start trading and be instantly successful, but it’s also unrealistic to assume that you will automatically fail miserably. After all…someone has to make up the small percentage of successful traders.
When did I say my method is the only way to succeed?
There are efficient ways to do everything in everything.
Taking quick profits to reset and look for another opportunity
is the most efficient way to go. Quick turnarounds with
least amount of time wasted without trades running for days
is the most efficient way to trade in the long run, not
some short run tests people run and get delusional with.
Long run meaning 5 years plus record!!! Not some promising
looking result from 3 months of demo trading. I only trade
one EUR/USD and I only take 10 PIP profits but I would
safely venture to guess that I make more money with less
stress and lot more efficiency than you could ever do with
your 8 pairs sitting on a trade for weeks with a take profit
of 250 PIPs. I am all about taking quick profits, doing quick
turnarounds, and making efficient trade upon trades. I do
well over 250 trades per month just trading EUR/USD.
You didn’t specifically state that, but you seem pretty negative about any other method. I’m glad that method works for you. I have made profits in practice going for 10-20 pips at a time as well. But I work a full time job and can’t watch the charts all the time to find these kind of opportunities consistently. Plus, if I were trading full time I would not want my day to be taken up in front of the computer. I trade off of daily charts and am very comfortable taking my profits in a day or 2-3. I have made as many as 1250 pips in one day (from trades that were opened that same day) and lost as many as 700. So far I am net positive 13.5%. Granted that is only over 2 weeks, but that is why I’m testing. I can tell you, though, that when I check my open positions in the morning and I see that I’m sitting on open trades at -560, I don’t panic or worry or doubt the system I’m testing. I go on with my day and at the end I tally my wins and losses. If this system ends up flopping, I will go on to test something else. Having traded on everything from 5 minute to daily charts though, I personally prefer the longer term…just my psychological position.
If you grow your account and compound it all the while, the bigger losses as you begin to trade a larger size shouldn’t bother you, as you are gradually ramping up the trade size.
I could imagine if you went from trading micros and then jumpied right into trading standard lots, the dollar values would send your head for a spin. With alot of brokers you can trade any lot size you want, so it is more than possible to just keep compounding as long as you want. Phsycologically speaking, i think this is the best route to trading larger positions and sustaining the larger losses.
If a trader can’t stomach the losses than FX trading is not for them, cause its part of the process.
There are oodles of ways to trade and as long as it works for you and you are comfortable with it, than all the best to you…
I find i have different strategies with each different currency pair I trade, and it seems to work okay
I see that I’m sitting on open trades at -560
is that on a demo trade or a live account? A single trade or combined trades?
The -560 in the example was 2 open trades, 2 lots on one, 3 on the other. Yes it is on a demo account. Those trades ended up closing for a combined gain of +890.
It does take some getting used to seeing large losses, but when you see how it comes out in the end, it gets easier.
for the loss or profit?..I was asking about the loss ones.
Assuming I calculate right…:o
So Std lots = $10/pip (or thereabouts depending on base of pair),
for loss:
5 lots = -$560/$10 = -56 pips,
divided by two trades; avg -28 loss/ trade
…but it could be any combination where one is -10 &the other -48, or -20 & -38, or …
for profit:
$890/$10 = 89 pips
89/2 trades could be 45 approx avg pips profit per trade
No…I’m doing .1 lots on a standard account (or whole lots on a mini), so 1 pip = $1. The pairs in question were EUR/USD and GBP/USD. Their 10 day average range was 225 pips and 264 pips respectively so my T/P and S/L were 110 pips for EUR/USD (trading 3 lots) and 140 pips for GBP/USD (trading 4 lots). So the fact that I was down 560 pips at one point was because I was trading a total of 7 lots with an average S/L of 125 pips. (Sorry…I think I had posted that it was 2 and 3 lots instead of 3 and 4) The S/L was not hit for either pair and they turned around during the US session to both close for profit totaling 890 pips. So along with the 3 other trades that I had that day (all closed positive) I ended up with +1250 pips = $1237.55 for the day. I ended up giving 700 back throughout the week, but that was because I am in testing mode and I don’t want to alter this system in any way. Had I been trading for real, I would’ve probably stopped for the week and called it good.
Thanks for clarifying.
I think I did mess up my calcs previously. :o pls disregard.
Anyways, I try to think of pips in terms of actual price movement…from where I entered to where it is in price regardless of how many lots I’ve opened. If price moved from 1.00 to 1.05 for example…and I’ve opened 5 lots, I consider it moved 5 pips… not 25 pips. I’m never sure which way some traders state their pips unless they give the open & close prices of their trades.
The power of compounding really depends on how smooth your equity curve is.
In the past I would trade a strategy that delivered great returns on a month to month basis, but during the month I would routinely have 5%-10% drawdowns. If you have a nice run of profits, then scale up your size just in time to eat a stop loss, it would really slow down your progression. For this strategy I created a compounding pyramid…
Risk 2% per trade (1 “unit” of risk.)
Any time I would be up 10 units or 20% I would rebalance my size UP and begin trading at that new level.
Any time I would be down 5 units or 10% I would rebalance my size DOWN and trade at that smaller level.
This rachet style of compounding worked well for me with a more volatile equity curve.
But to really see the power of compounding, you need a super stable and high probability strategy that you can compound on a daily level…something where you have a reasonable expectation to see a profit at the end of each session.
Then you can rebalance each day or week and see your growth really begin to accelerate.
3% per week for 3 years delivers $52,000 for every $1,000 you start with. The wealth building power is staggering IF you stick to it with a single minded focus in consistency and smooth equity curves.
