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Is compounding necessary?

SINGY14 (SINGY14)
Oct 22 2012 at 10:24
1 poster
Try one of analytical programs that will help with your position sizing, you can test it with your results and will see what is the best choice for you.

When you let others influence your decisions, you lose your chance of success.
domgilberto1 (domgilberto1)
Oct 22 2012 at 10:52
72 poster
incometrader posted:

That's right your risk stays the same if your compound rate stays the same. But, if you want to reduce your risk as you grow your account, you may want to compound at a rate of 50% for example. What you're saying is fine for something like a term deposit where there is no risk, but with FOREX (as risky as it can be) it's wise to reduce risk.



I completely disagree. There is no logical reason to decreasing your risk percentage of your closing balance? If you choose 2% risk profile of your closing balance then it is always 2% of your closing balance...

Why would you decrease your risk profile on winning trades, and what, keep it in the same on losses? Or decrease it then too.... If you knew what you were talking about you`d fully understand the implications through back-testing and vigorously understanding how MM effects your bottom line through messing around with your risk profile....


I am not sure why I am even bothering explaining this or getting involved lol.


Do what AO said above^.



"Taking responsibility is the cornerstone to a winning attitude"
incometrader (incometrader)
Oct 22 2012 at 11:01
157 poster
domgilberto1 posted:
incometrader posted:

That's right your risk stays the same if your compound rate stays the same. But, if you want to reduce your risk as you grow your account, you may want to compound at a rate of 50% for example. What you're saying is fine for something like a term deposit where there is no risk, but with FOREX (as risky as it can be) it's wise to reduce risk.



I completely disagree. There is no logical reason to decreasing your risk percentage of your closing balance? If you choose 2% risk profile of your closing balance then it is always 2% of your closing balance...

Why would you decrease your risk profile on winning trades, and what, keep it in the same on losses? Or decrease it then too.... If you knew what you were talking about you`d fully understand the implications through back-testing and vigorously understanding how MM effects your bottom line through messing around with your risk profile....


I am not sure why I am even bothering explaining this or getting involved lol.


Do what AO said above^.


I give up... You've completely missed the point...

Gary Sharp myfxpt com
myfxpt
Oct 22 2012 at 22:41
345 poster
Here's what I do: (1) Allow compounding at 100% of profit because, as already noted in this thread, risk remains exactly the same. Only the dollar value of risk increases as equity grows, not the percent risk factor. (2) When capital is doubled I withdraw 1/3 of my account balance, which allows account funds to grow whilst I take profit off the table. Now my risk factor applies to 2/3 of my equity, which lowers the dollar value of risk but leaves the percent risk factor the same.

The only way to reduce risk is to reduce the percent risk factor you apply to equity, or stop trading. With that said, it's good to find a thread focussing on money management. Is anyone up for a discussion on Risk of Ruin?

incometrader (incometrader)
Oct 22 2012 at 23:35
157 poster
'Is anyone up for a discussion on Risk of Ruin?' That's an excellent thing to discuss. I've 'ruined' my account a couple of times, and due the nature of my trading it's something I need to reduce.

James_Bond
Oct 23 2012 at 13:37
556 poster
@myfxpt Problem is you're chasing your return as you need to double your money before you take out profit - if you have a big loser before your withdrawal, it will obviously hurt you a lot more than if you were not to compound at 100% - this is simply a question of when will a losing streak will happen; if you were to know that you would also know when to compound at 100% and when at 0%.

What about risk of ruin? I just look at it to see if I'm doing fine - are you using it differently?

James_Bond
Oct 23 2012 at 13:37
556 poster
incometrader posted:
'Is anyone up for a discussion on Risk of Ruin?' That's an excellent thing to discuss. I've 'ruined' my account a couple of times, and due the nature of my trading it's something I need to reduce.


😀

Michigander (Michigander)
Oct 23 2012 at 19:54
321 poster
Boy, lots of cavalier statements on this thread. Everyone should be concerned about risk of ruin, and not just the 'blow smoke up your ass' percentages that are provided. All things being equal, things are never equal. Today is not like yesterday, Tomorrow will not be like today. If you are trading an EA, and are compounding, you are a fool, and you are your money will soon be parted. Always, always, ALWAYS, transfer profits into a separate account until you have recaptured your initial investment. Now you are playing with the houses money. After that, if you want to 100% compound, have it. I think a more rational approach, after recouping your seed money would be to let half the profits ride, and transfer half the profits out weekly.

War is when your government tells you who the enemy is. Revolution is when you figure out, for yourself, who the enemy is.
James_Bond
Oct 25 2012 at 15:37
556 poster
@Michigander everyone has their own preference. I do agree that risk of ruin is an important factor in determining the risk of a system and therefore helping you to decide how much should you compound. I think any system which needs at least 100 trades to be ruined, can be safely compounded.

Gary Sharp myfxpt com
myfxpt
Oct 31 2012 at 00:51
345 poster
It is about preferences and circumstances. If you start out with, say, $500 capital and average 20% per month return, you will most likely want to build your capital before withdrawing profit. Alternatively, if you start out with $50,000 capital and average 20% per month return, you will likely want to withdraw some profit. The decision to compound is usually start-up capital related, in that the more we start with, the less need we have to compound.

As I have already said, my plan is simply to double my capital and withdraw 1/3 of profits. This allows capital growth and a reward for effort. When my capital is sufficient to generate the monthly income I need, and if my monthly earnings have proven to be stable and reliable for several months, then my drawings increase to 90%-95% on earnings, leaving 5%-10% growth capital in my account. This keeps me up with inflation.

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