A Different Way to Think About Compounding
Rather than increasing deposits, I've been studying a staged compounding approach where each new stage is funded by profits from the previous one.
The concept isn't about predicting the market, it's about structuring risk differently .
Let me give you a Numerical Example here :
- Stage 1: Risk $10 → Target $100
- Stage 2: Use the $100 profit instead of new capital
- Stage 3: Risk only part of the previous profit
- Stage 4: Continue using accumulated profits
The idea is to expose personal capital only at the beginning and let the profits finance the following stages ..
The challenge, of course, is that this approach still depends on finding high-quality entries
I'm curious to hear your thoughts on this type of money management .
As I think FX is a cash cow machine, this concept is really good... "Adding fuel to the fire", Soros or Drunkenmiller or somebody said it... utilizing the maximum outcome of the profit is indeed a good strategy, but at the end of the day the over Logic must also be good.
A key point of this approach is the quality of the entry.
The better the initial entry, the less recovery is needed., that means fewer recovery trades, lower commissions, lower margin usage, and a much smaller probability of reaching dangerous exposure levels. In other words, improving the first entry has a multiplying effect on the entire strategy.
What conditions do you personally require before calling an entry "high quality"? Are there specific confirmations, indicators, price action patterns, or market conditions that make you confident enough to accept a small drawdown while expecting the trade to develop in your favor?
I'd be interested to hear how experienced traders define a solid entry before thinking about position sizing or mooney management.
A key point of this approach is the quality of the entry.
The better the initial entry, the less recovery is needed., that means fewer recovery trades, lower commissions, lower margin usage, and a much smaller probability of reaching dangerous exposure levels. In other words, improving the first entry has a multiplying effect on the entire strategy.
What conditions do you personally require before calling an entry "high quality"? Are there specific confirmations, indicators, price action patterns, or market conditions that make you confident enough to accept a small drawdown while expecting the trade to develop in your favor?
I'd be interested to hear how experienced traders define a solid entry before thinking about position sizing or mooney management.
I would not overemphasize the quality of the entries, alone. Relative drawdown and maximal drawdown are the first two metrics that I look at.
Also, my go-to for compounding is a fixed percentage of account balance based on my maximum dynamic exit loss or my fixed stop (my fixed stop is usually a mere backup stop). In this way, my live trading risk is always proportionally aligned with my backtest statistics (this is important when trading with a proprietary trading firm─I must calculate those drawdowns in advance so as to stay within the firm's limits).
Well said , compounding is only an accelerator , the real engine is a robust trading strategy. Without that, no money management can create a lasting edge.
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Rather than increasing deposits, I've been studying a staged compounding approach where each new stage is funded by profits from the previous one.
The concept isn't about predicting the market, it's about structuring risk differently .
Let me give you a Numerical Example here :
The idea is to expose personal capital only at the beginning and let the profits finance the following stages ..
The challenge, of course, is that this approach still depends on finding high-quality entries
I'm curious to hear your thoughts on this type of money management .