A Proven Way to Increase Your Forex Trading Gains

 

Compounding is pivotal to any successful investment strategy and powerful when used with fixed odds investments, due to the short time frame of trades. The concept is actually quite simple. When you invest money you will achieve a return on capital. The next year you earn a return on both your original capital and the return from the first year. In the third year you earn interest on your capital and the return accumulated from the first two years.

To illustrate this let us assume you deposit £10,000 with a Bank paying 5% interest. At the end of year 1 you would receive interest of £500 (5%). The following year you would receive £500 (5% return on your original investment) plus £25 (5% return on the interest you earned last year). In the third year you earn interest on your capital and the first two years’ interest. So the total interest you would receive would be £551.25. The additional £51.25 comes from the compounding interest. So you can see that the concept of earning interest on your interest is the miracle of compounding!

Compounding is often referred to as the ‘Snowball effect.’ As your capital rolls down the hill it becomes bigger and bigger. Given enough time, even a small snowball can grow to an extremely large size!

From the brief illustration above, you can see compounding working, but with annual bank interest you would be forgiven for thinking this is a long term strategy. However compounding does not just work with bank deposits. It can be applied to any form of investment where the return is applied to the investment. Returns can compound on an annual, quarterly or even monthly basis. The shorter the time period for the compounding basis, the better the returns you will receive as an investor. This is where trading Forex with Fixed Odds particularly benefits.

As we are able to achieve our returns in days with Fixed Odds trades, it allows us to rapidly accumulate capital. Furthermore because we have compounding on our side, we do not need to chase the high risk trades to make substantial profitable gains.

As with any form of investment, we believe money management to be as important as picking successful trades. Yes it is that important! Picking winning trades is only half of the equation. All traders should have a good understanding of money management principles and compounding before even attempting to trade.

Let us assume that we achieve a 10% return on our £1000 bank at the end of month one. We are using 10% staking rules so during the first month we were staking to win £100 on each trade. So at the start of month two we have a bank of £1100. So using our 10% staking rules we now stake to win £110 on each trade (10% of £1100). By the end of month two we have again made a 10% return. Our bank now stands at £1210. So for month three we would again be staking 10% on each trade, which is now £120. And so on for subsequent months. At the start of every month we review our bank and determine our stake size for each trade. We never risk more than 10% of our capital per trade, however our stake size gets larger. Thus the profit that we can earn from our Fixed Odds Financial Trading increases!

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