Forex Compound Strategy: What is it?
Whatever the experience level of the trader, whether they’re new to the forex market or have been trading forex for years, the simple principle of compounding must be understood.
Compounding works in all markets, not just foreign-exchange. From property investors to option writers selling options for income and from commodities traders to margin stock traders, compounding benefits all investors and traders.
Its precise application may vary according to the instrument but the essence of compounding is always the reinvestment of earnings and profits.
It’s the consistent reinvestment over time that creates the explosive growth that can bring wealth to retail forex traders.
How to Grow Your Profits with No Extra Risk
When currency trading, the reinvestment means retaining profits in their trading account. The dollar amount staked on each trade can be increased without any change in the percentage risk to the account. And the potential profit on each trade naturally rises in proportion.
A forex trader who wants to risk no more than 2% of a $5,000 account will need to place a stop loss at no more than $100. A suitable profit target might then be $200, $300, or more, depending on the trading strategy.
Taking a 5% monthly profit as an example. Make no change in position size, then that trader would then have just an extra $250 a month in their forex account to trade.
Apply that sum to the trading account and their $5250 allows them to set stop losses at $105 and profit targets at, say, $210 or $315. Make another 5% profit on that $5,250 and they will then have an extra $262.50 to add the next month.
The Magical Power of Compounding
It might not sound very dramatic in these early stages, but the magic of compounding is how growth accelerates over time.
The example given above shows how simple compounding is. It means smaller trading accounts can grow in size without any greater risk when there’s an increase in market volatility. The trader does not need to worry about which forex broker or trading platform to chose. And neither technical analysis or fundamental-analysis are relevant and and nor is the forex news or even pips and spreads. They are all irrelevant, by simply compounding his profits, the trader can grow his wealth exponentially.
You can get an idea of how this might look in practice by trying my free Forex Compound Calculator right here.
You should pay particular attention to the graph it generates, which provides a vivid picture of exponential growth.
How the Calculator Works
Just enter your starting trading account balance, your projected monthly profit, and the relevant number of months to see where you might be in a year, two years, or at any point in the future. Now, of course, in the real world, it isn’t quite as simple as that. Most traders will want to spend some of their profits at some point, rather than compounding everything they earn.
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