How Do You Compound Your Account While Paying Yourself? | Forex Factory

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How Do You Compound Your Account While Paying Yourself?

  • #1
  • First Post: Oct 2, 2022 12:55am Oct 2, 2022 12:55am
Certainly this discussion is for those who already have a proven profitable system and continuous stable performance, and now advancing to the next step: growing their account while enjoying their profit for themselves.

In 2022 we have tons of prop firm companies and you could be trading 3-4 accounts simultaneously.
But for the sake of this discussion, let's say you only have your own personal account.
Any deposit made from withdrawing money from funded account, we'll say that money is from your day job income.

Here's the scenario:
Your initial balance is $10,000.
After months of backtesting and forward testing, you have now found your own profitable trading system, and slowly but sure, your equity graph starting to show a positive trend.
All this time, you only thought about the trading system and how to manage your mindset.
You cared nothing about growing the account (how can you think about that when you're always in the minus??).
But now, you realized it's time to shift your mind from creating a trading and psychological system, to creating a system to compound your account while paying yourself.

Focus on compounding your account without withdrawing anything = you miss life's joy of enjoying your own profit.

Withdraw all the profit regularly to pay your bills or to enjoy yourself a nice weekend trip = your account won't grow.


The discussion:
How do you find balance between growing/compounding your account, and enjoying your life by withdrawing the profit? What do you think is the sweet spot?
Do you wait until your account reaches xx dollar and withdrawing xx% of the profit while leaving the rest to compound?
Do you compound your trading size immediately when there is profit, or do you wait until it reaches a certain amount first?

I think this is also an important aspect within trading that is not discussed enough.

Let's discuss it in a friendly, respect-each-other manner.
Have a safe trading, people.
  • #2
  • Oct 2, 2022 8:35am Oct 2, 2022 8:35am
You set a goal on how much/often you "need" to withdraw $$; with your starting balance (the more the better as you might now already) and with the optimal % risk per trade for your strategy (I hope you figure out your Risk Of Ruin already lol) you can calculate how many trades/time (in average) it should take you to get there every time..

You compound your balance with every trade using a % based risk per trade, and if you really want to grow and withdraw at the same time then only withdraw an amount that wont return you to your initial balance, always have more.. OR inject more $$ to your account via other means =)

Good luck
  • #3
  • Oct 3, 2022 6:35am Oct 3, 2022 6:35am
Quoting havo
You set a goal on how much/often you "need" to withdraw $$; with your starting balance (the more the better as you might now already) and with the optimal % risk per trade for your strategy (I hope you figure out your Risk Of Ruin already lol) you can calculate how many trades/time (in average) it should take you to get there every time.. You compound your balance with every trade using a % based risk per trade, and if you really want to grow and withdraw at the same time then only withdraw an amount that wont return you to your initial balance,...
Withdraw a certain amount that won't bring you to the initial balance. Got it.
Let's say your initial balance is $10,000.

This month you gain 10% ($1,000).
Say, you withdraw $500 for living, leaving you $10,500 in your account.

You continue trading with 1% risk.
At this point, when do you compound your trade size?
Will you take 1% out of $10,500 or is the 1% still out of $10,000 until it reaches certain % of profit?
Just wanted to make sure how different people will react to this situation.

Have an enjoyable week, man!
  • #4
  • Oct 3, 2022 7:55am Oct 3, 2022 7:55am
Definitely, I would like to use a certain amount as my trading capital; like $10K would be the fixed amount as my capital, and I’ll withdrawal my profit as monthly basis!
  • #5
  • Oct 4, 2022 8:51am Oct 4, 2022 8:51am
Depends on your own psychology I suppose and having a proper plan to execute compounding.

A plan like this may be helpful if you have a good hit rate using a 1 to 1 RR


Attached Image (click to enlarge)
Click to Enlarge Name: Compounding.png Size: 19 KB

This is an agressive "double up" plan you can alter it and take profit at any stage you choose and use less risk.
  • #6
  • Oct 5, 2022 12:58pm Oct 5, 2022 12:58pm
Quoting Fagin
Depends on your own psychology I suppose and having a proper plan to execute compounding. A plan like this may be helpful if you have a good hit rate using a 1 to 1 RR {image} This is an agressive "double up" plan you can alter it and take profit at any stage you choose and use less risk.
you can not increase your risk without recalculating your Risk of ruin, unless you want to bust your account.. Unless you want to go "all or nothing" like gambling and hope to make a good profit
  • #7
  • Oct 5, 2022 1:03pm Oct 5, 2022 1:03pm
Quoting jpntrader
{quote} Withdraw a certain amount that won't bring you to the initial balance. Got it. Let's say your initial balance is $10,000. This month you gain 10% ($1,000). Say, you withdraw $500 for living, leaving you $10,500 in your account. You continue trading with 1% risk. At this point, when do you compound your trade size? Will you take 1% out of $10,500 or is the 1% still out of $10,000 until it reaches certain % of profit? Just wanted to make sure how different people will react to this situation. Have an enjoyable week, man!
exactly you always leave a bit more than the initial so the account can keep growing and not stall without messing the original Risk of ruin calculation; Every new trade will be "compounded" based on your new balance; if it gets bigger so will be the trade size and viceversa (using % based of course) the results its exponential grow going up and smaller losses going down on streaks

extremely important is to trade EXACTLY the same way in every single trade so the numbers are real and not random every time
  • #8
  • Oct 5, 2022 1:23pm Oct 5, 2022 1:23pm
Quoting havo
{quote} you can not increase your risk without recalculating your Risk of ruin, unless you want to bust your account.. Unless you want to go "all or nothing" like gambling and hope to make a good profit
If you read the plan I posted you are compounding the netted profit not the risk so your risk of ruin is always set to the 1st trade level. This is how some multi level hfts (High Frequency) work.

It’s pretty simple maths but I don’t know many traders that actually can make a profit let alone compound it several times.
  • #9
  • Oct 5, 2022 1:45pm Oct 5, 2022 1:45pm
Quoting havo
{quote} exactly you always leave a bit more than the initial so the account can keep growing and not stall without messing the original Risk of ruin calculation; Every new trade will be "compounded" based on your new balance; if it gets bigger so will be the trade size and viceversa (using % based of course) the results its exponential grow going up and smaller losses going down on streaks extremely important is to trade EXACTLY the same way in every single trade so the numbers are real and not random every time
I’m not following your logic that your can have exponential growth yet have “smaller losses”. It goes both ways does it not?

You cannot compound successfully if you do not know your frequency distribution and your trade expectancy performance , that will just be a complete burn out of your account.

Compounding an account is earned and not always a good idea for most without a proper plan. Compounding your equity balance is a sure way to blow up. Exponential UP is just as easily Exponential Down.

  • #10
  • Oct 5, 2022 5:40pm Oct 5, 2022 5:40pm
Quoting Fagin
{quote} If you read the plan I posted you are compounding the netted profit not the risk so your risk of ruin is always set to the 1st trade level. This is how some multi level hfts (High Frequency) work. It’s pretty simple maths but I don’t know many traders that actually can make a profit let alone compound it several times.
Ok im trying to understand your picture here. I am a new trader, love the idea of compounding and am looking at different strategies. For the three trades under each tier are you risking that said amount per trade (for instance tier 1's trades are 200 each) or is that profit you are shooting for? If it's the former, what happens if you win/lose on those 3 trades? If you make money on all of them you use that as your risk, correct? If you lose money on the trades, do you decrease your tier 1 risk and start over?

Im just trying to figure out exactly how the tier system works. I like the idea of using profit for future risk to keep my risk of ruin low. Thanks for sharing!
  • #11
  • Oct 5, 2022 7:20pm Oct 5, 2022 7:20pm
Quoting Fagin
Depends on your own psychology I suppose and having a proper plan to execute compounding. A plan like this may be helpful if you have a good hit rate using a 1 to 1 RR {image} This is an agressive "double up" plan you can alter it and take profit at any stage you choose and use less risk.
Absolutely amazing. In my mind I know I need an exact plan with clear step by step instruction for compounding (as I do have with the trading strategy).
But not a lot of people are discussing this, and only focusing on trading strategy. Combined with my so-so brain capability, creating a clear plan takes time haha.

This is a great foundation to start with.
So here comes my question: what does the "T1 T2 T3" mean and how is it supposed to aid you in this plan? Because all I can see is you are starting a new trading balance every time you achieve 3R.

Thank you for taking your time and showing us this table; it's a lot easier to digest.
  • #12
  • Oct 6, 2022 1:51am Oct 6, 2022 1:51am
Firstly I'd like to say be careful when using "risk of ruin" it is ok for theorising risk to reward but that's about it. If you use it for money management and your own psyche you may as well call it road of ruin because thats where you'll end up, just very, very slowly like the brokers intended it to be..

So this is a very much dumbed down algorithm based on Euler. Adapted to trading requirements as sadly we can't trade to infinity and beyond due to margin/drawdown and other boring things.

Best to create your own spreadsheet and build it so you can see it working for you:

Lets just look at the starting point:

Your trading balance is lets say £10,000 you want to risk 1% per trade and for simplicity lets say your take profit is also 1%

So the aim is to get to £10300 which is 3% before you increase your risk size. This what I call a stack, 3 completed trades at 1% each = 3% of starting balance

Attached Image (click to enlarge)
Click to Enlarge Name: stage1.png Size: 3 KB

Now we have a stack we can "safely" increase our risk to (in this case) 2% of STARTING BALANCE this is important as your starting balance is your "n" number and this is constant, do not use your current balance. So to be clear we are using 2% risk of our £10000 starting balance:

So now we have £200 risk per trade and again we want to repeat the process aiming to get 3 x £200 = £600

Stage 1 and 2:

Attached Image (click to enlarge)
Click to Enlarge Name: stage 2.png Size: 6 KB

Let's say you lose your 1st trade at 2% your loss is -£200 so this is what happened to your balance: it was at £10300 and now it is £10100. So you go back to Stage 1 and only risk the Stage 1 stake i.e. 1% until you get above £10300 again. At that point you can go back onto to Stage 2 risk, and so on...

Take profits when you plan to and start it again.

There is nothing useful on google/youtube regarding forex money management and sadly not a great deal in this forum.

Independent thinking will make you a winner.
  • #13
  • Oct 7, 2022 8:52pm Oct 7, 2022 8:52pm
Quoting Fagin
Firstly I'd like to say be careful when using "risk of ruin" it is ok for theorising risk to reward but that's about it. If you use it for money management and your own psyche you may as well call it road of ruin because thats where you'll end up, just very, very slowly like the brokers intended it to be.. So this is a very much dumbed down algorithm based on Euler. Adapted to trading requirements as sadly we can't trade to infinity and beyond due to margin/drawdown and other boring things. Best to create your own spreadsheet and build it so you...
Fagin, what a beautiful explanation.
You know, sometimes we get too focused on the trading strategy that we forget this compounding strategy is also part of the game.
Now that it's weekend and I have a long weekend in my country, I will try to simulate how it goes with your system.

But first impression. you're correct, this is an aggressive plan.
At my current state, I usually risk no more than 2%, so if I'm trying to be more aggressive, stage 3 (3% risk) is the maximum I would go.
Thank you man. Have a fun weekend.
  • #14
  • Oct 8, 2022 1:47am Oct 8, 2022 1:47am
Quoting jpntrader
{quote} Fagin, what a beautiful explanation. You know, sometimes we get too focused on the trading strategy that we forget this compounding strategy is also part of the game. Now that it's weekend and I have a long weekend in my country, I will try to simulate how it goes with your system. But first impression. you're correct, this is an aggressive plan. At my current state, I usually risk no more than 2%, so if I'm trying to be more aggressive, stage 3 (3% risk) is the maximum I would go. Thank you man. Have a fun weekend.
You are welcome. Thanks for taking the time to understand it.

I normally use 0.5% and cash out at stage 3 or 4, pay myself and start again. You can adapt it to however you trade… but the most important part is you are thinking about money management before you trade.

Be good

F
  • #15
  • Oct 11, 2022 9:46pm Oct 11, 2022 9:46pm
Quoting Fagin
{quote} If you read the plan I posted you are compounding the netted profit not the risk so your risk of ruin is always set to the 1st trade level. This is how some multi level hfts (High Frequency) work. It’s pretty simple maths but I don’t know many traders that actually can make a profit let alone compound it several times.
zooming in the picture now i can see it, my bad
  • #16
  • Oct 11, 2022 9:51pm Oct 11, 2022 9:51pm
Quoting Fagin
{quote} I’m not following your logic that your can have exponential growth yet have “smaller losses”. It goes both ways does it not?
No, because on a streak, for a given % os risk per trade, IF you are wining the lot size gets bigger and the profits gets bigger too; on a losing streak, the lot size gets smaller (to maintain the same % ratio) and the losses smaller eery subsequent time of course =)

Quoting Fagin
{quote}You cannot compound successfully if you do not know your frequency distribution and your trade expectancy performance , that will just be a complete burn out of your account. Compounding an account is earned and not always a good idea for most without a proper plan. Compounding your equity balance is a sure way to blow up. Exponential UP is just as easily Exponential Down.
exactly, and you can only know this after back and forward testing and tuning the risk % per trade (after you have a proven entry/exit/position management method, etc etc) so your risk of ruin stays as low as possible!! pretty basic, other wise, like you say (and i did early too), anyone is just gambling and not trading =)
  • #17
  • Oct 12, 2022 8:07am Oct 12, 2022 8:07am
Quoting havo
{quote} No, because on a streak, for a given % os risk per trade, IF you are wining the lot size gets bigger and the profits gets bigger too; on a losing streak, the lot size gets smaller (to maintain the same % ratio) and the losses smaller eery subsequent time of course =)
I kind of get the overall concept but having a bit of hard time getting down to the details.
Can you give us some examples/simulation?
How bigger the % risk should be if you are winning? Etc.
  • #18
  • Oct 12, 2022 8:50am Oct 12, 2022 8:50am
Quoting havo
{quote} exactly you always leave a bit more than the initial so the account can keep growing and not stall without messing the original Risk of ruin calculation; Every new trade will be "compounded" based on your new balance; if it gets bigger so will be the trade size and viceversa (using % based of course) the results its exponential grow going up and smaller losses going down on streaks extremely important is to trade EXACTLY the same way in every single trade so the numbers are real and not random every time
Why not. There are so many ways to trade and manage you risk and no one approach fits all. But, seriously, if you want to grow your account aggrsssively and yet conservative you need to "leave" the 1% risk on the night table. I know we should not be in trading for quick money. But there are approaches to increase your profits without increasing your risk (significantly). You add aggressively to your winners. Say your target on a specific trade is 1:4. If I am in a trade that moves my direction I will add to it when I can move my stop on my initial position to BE. On my second trade I will risk the open profit on the first trade and in some cases even my additional risk. So although I have doubled or even tribled my stake risk remains the same.

Adding is not for everybody and it takes mental strength to see winners turning into losers or BE's because of adding and monitoring risk. But you only need one trade to realize the power of adding to winners.

Good luck.
  • #19
  • Oct 12, 2022 9:51am Oct 12, 2022 9:51am
Quoting Banditten
{quote} Why not. There are so many ways to trade and manage you risk and no one approach fits all. But, seriously, if you want to grow your account aggresssively and yet conservative you need to "leave" the 1% risk on the night table. I know we should not be in trading for quick money.
We should ALWAYS be trading for quick money and a lot of it !!! and i agree with you, there are different aproaches for this BUT the most important is to start with a capital that i wont hurt you to lose it entirely at all; for example, if you deposit 1000$ is because that "chump change" for you or it doesnt/wont hurt you to lose it at all.. THATS when you can use a "extreme" approach

However!! even with "disposable" money, you still have to do you numbers !!

Quoting Banditten
{quote}But there are approaches to increase your profits without increasing your risk (significantly). You add aggressively to your winners. Say your target on a specific trade is 1:4. If I am in a trade that moves my direction I will add to it when I can move my stop on my initial position to BE. On my second trade I will risk the open profit on the first trade and in some cases even my additional risk. So although I have doubled or even tribled my stake risk remains the same. Adding is not for everybody and it takes mental strength to see winners...
For sure, but thats an "advanced" level of trading, someone doing that needs/must know how to trade well and consistently in the first place to make it work; thats why is so funny (at least for me) to read some threads in this forums about this and the response they get hehe
  • #20
  • Oct 14, 2022 5:29am Oct 14, 2022 5:29am
Just like finding a strategy there are many, many different ways to manage the trade.

I wonder why there are so many threads about entries, risk to reward and blah, blah, blah.... but nothing about in-between? It's the in-between that is the main bit. Folks just don't get it or are too egotistical and greedy to not put the work in. That's why they are all failures, they cannot think for themselves and copy other failures.

Intelligent conversation about trade management would make this a fantastic thread that actually might be useful to those with a brain and open mind.
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