Have you ever thought about what forex compounding stands for? Why are people using it very frequently nowadays? In this article, we will give you insight into forex compounding and what it means in general.
To understand compounding in forex well, you need to know what the term ‘compounding’ really stands for.
Let’s get started with the term ‘compounding’, shall we?
Compounding – term explanation
Compounding is the term used to describe the process where an existing principal amount is credited to interest and already paid interest.
Some people describe it as interest on interest, which is the effect that boosts returns of interest over a certain period. It’s also called ‘the miracle of compounding.
Forex compounding – understand what it is exactly
Compounding a forex account means a money management technique that allows you to take the money you had earned in profit, which you can later invest in more weight. Hence, you will build up the trading account capital in a very high and exponentially profitable way.
Forex compounding calculators help you to understand better how your trading account grows over time. Don’t forget that even the most moderate monthly gain can turn your capital into a very significant amount of money over some time.
And what about Forex compounding strategies?
Understand positive netting pips
The key to compounding a forex account is to have positive netting pips. It means that, for this system to work, your trading success rate should be above %51. In other words, more than 50% of the time, you need to be successful from entry to exit.
Hitting this rate allows you to use the leverage that a forex market provides you. Nevertheless, if you want it to work out ultimately, your approach needs to be methodological and intelligent, not in a way to put your labor at any risk.
Remember, when you have the accuracy rate above 51% and net positive pips, you need to consider shifting the workflow to manage your actions in percentages. You can measure it by two ending points – from the risk perspective or profit expectation.
The importance of compounding swing position
Keep in mind that compounding doesn’t necessarily need to be from trade to trade. It’s also available for you to manage it through a running long-term rate when you are holding the positions and when you are sure when your trade has gone to key price levels, and you’ve got the confirmation that they are not returning.
It’s always good to dedicate a part of the floating profits you have created to scale up your position once the price has been completed instead of raising your stop loss. Remember that you are allowed to compound what you’ve gained in that particular kind of position to gain more on the trade itself and to scale up.
Summary of Forex compounding
To sum up all from this article, here is what you need to remember:
- Compounding a Forex account stands for a money management technique that allows you to get all the money you have made in profit and invest it more weight.
- You will build up your trading account capital over time in a profitable way.