few newbie questions - compounding

hi all. i was just wondering, if i start a live account with £2000 (mini account im assuming?), then how much can i gain per pip gained?

also, i've read up a little on compounding. it sounds simple enough. but i'd like to clear one thing up. if i had lets say £5000 in my live account, and i wanted to double that to £10,000, then would i have to place all £5000 on the trade? if so, how would i go about doing that on IBFX?

thanks all

Woho not so fast.
How much you CAN gain per Pip depends on your leverage if you have insanly high leverage (I've found leverage has hig as 700:1) you COULD (doesn't mean it's a wise thing to do) probably trade 20+ Lots wich gives you on the EUR/USD 10$ per Pip per Standard Lot * 20 = 200$ per Pip. Since leverage works both ways your capital will get eaten equally fast.
Compounding is nothing more than reinvesting you gains.
For example you could place a trade which yields 200$ your equity is now 5200 now that you have more money you can increase your lot size a little bit while keeping your risk the same. This will make the account grow exponentially bringing you safely to 10k. Even without risking your money all at once.

I'm answering here to an PM I got because my answer was to much for the PM System. I hope it will be useful for a few other too

It's ok I'll show you how real compounding looks like. Forget about what these guys are doing that has nothing to do with trading. It's just like playing the lottery only with slightly better odds. Or imagine russian roullete and you gain 1000 GBP each time you don't blow your brians out. How long would you like to try that?

I bet you heard enough times that you should never risk more than 1% at once. That is conservative trading. I like to risk 3% which is considerd aggresive. 2% more make a big difference on the long run.

Example:
Imagine a risk free bond that will give you 8% per year and you invest 10k GBP for 20 years and never take out any money. It will look like this

10.000*1,08(8%)^20=46.609 GBP
So it's basicly 10k*1,08*1,08*1,08.... (20 times 1,08)

Now we take a bond that gives you 10% a year
10.000*1,10 (10%)^20=67.274 GBP
So you made 20k more in that same period with only 2% more.

Well how does that relate to trading?
It goes like this.
Let assume 1k USD Account Balance. You decide to risk 3% on each trade.

1.How much is that?
It's 1000*0,03 = 30 USD
So if you trade and it hit's your stoploss the most you want to lose is 30 USD.

2. How big is my stop and how much lots should I trade to end up with only -30USD if the trade goes bad?
You have to determin the stop youself [it's better to adjust it according to the chart. You want that price has trouble reaching it. So you place it behind support or resistance e.g and add some pips so it can "breath". Don't just take a fixed number! ]
Let say that distance is 50 Pips. To sum it up you want that if price goes 50 Pips against you the most you can lose is 30 USD which is 3% of your current balance.

3. How much lots would that be?
If you trade 1 standard Lot each Pip is worth 10$.
If you'd trade 1 Lot and it goes 50 Pips against you. The loss would be 50 pips * 1 Lot * 10USD/Pip = 500 USD. WAY TO MUCH! So how do we calculate just the right lotsize with a given risklevel (3%=30USD of 1k) and SL (50 Pips).
You get an equation with one variable. It looks pretty much like the one we used to determin our loss with 1 full lot.
30 USD (loss) = 50 Pips (at risk) * 10 USD/Pip * X Lots

Now we solve for X and we get 0.06 standard Lots because 0.06 Lots * 50 pips at risk * 10USD/Pip = just 30 USD.

Now that you understand how your risk is a function of the Pips at Risk combined with the Lotsize traded and the Pip value you can ask yourself. So 50 Pips down = 3% lost. What if price goes that 50 Pips in my direction? Easy you will be up 3% as well, because your winning also is a function of Pips, Lots and Pip Value. If you take profit at 100 Pips you just made 6% gain on your account with one trade. In this case you would have won 60 USD (since 3% is 30 USD we calculated that at the beginning).
Now you have a new balance 1000 USD + 60 USD gained = 1060 USD.

Now your next trade. What do you do? Start at the beginning and do excatly the same. How much is 3% auf 1060? It's 1060 * 0,3 = 31.8 USD.
So it seems that you would lose more (it was 30 USD with the first trade) but it's still 3% and if your TP is at 100 just like the last time we would end up with 63.6 USD gain bringing our balance to 1060 + 63.3 gained after second trade = 1123.6 or +12.36% of your initial 1000 USD. All this by risking only 3% at a time! Noticed how your Gain got bigger the second trade? CONGRATIULATIONS YOU JUST COMPOUNDED YOUR ACCOUNT BALANCE! Now keep repeating that cycle! This way you will always have a certain lotsize that you should trade. Don't guess! "Ohh lets trade 3 Lots on that one and 1.234 Lots on that one."Leave that kind of trading to the newbees. Use the math!

Also if you take a look at the equation and your pips at risk is lets say 150 but you just want to risk 3% your lotsize will get smaller. Bigger stops should never mean higher risk!

Back to the Threads you have mentioned.
What they are doing is exactly the same but they take 20% in the first step. This will crank up the process but after a series of 3-4 losses you would have lost a huge part of your account.
With that 3% I told you you can get veeery far.
If your risk 50 and try to get 50 to have a 1:1 Risk to Rewar Ratio you could earn 3% with one trade. That is more than most people get on their savings account in a year. If you could turn 1k into 1 Million in 10 years. Wouldn't that still be great? If you look back that's 100k a year on average. Don't shoot for the stars it will only blow your account. Take it slow. The markets will be there longer than you will probably live. 1k to 1 Million in 10 years is still waaaay better than blowing it in 2 weeks with 50% risk. Don't be an idiot. There enough of them already on this planet. Just watch the news.

I have composed a small spreadsheet to show you how the account would develope with the variable used above.
Keep in mind that thats with winning every trade. You don't have to. If you lose and your balance get's smaller (by 3%) do the cycle again!

Regards,

TJPLD

Tjpld:

Thanks for the info in this thread, just read it and found it very useful.

Thanks again,
lindee

Nicely explained... very easy for new traders to follow and understand

Thanks for the feedback.
Also this is not just some small advice. Or something
that just a few people to. I guarantee you that no one
will have any long term profits if he does not start trading
with just the right lotsize and risk.

Very nice......

Thanks for the time you take to prepare and write this....

If you take a 20 pip stop it's actually more risky than entering
with a 100 pip stop I should add. Why?
Because a 20 Pip move does no have any meaning. You will
get stopped out only because some hedge fund decided to push
the price around like a tennis ball. If price moves 100 pips there
is a fundamental reason behind it proabably. Think about it.

I agree 100%.
Besides, the normal fluctuation of the price even inside a trend, is about 15-20 pips in average (this on EURUSD - I'm pretty certain that for more volatile pairs it's much bigger...). You can see that on very small TF charts, as for example 5sec charts (Oanda). So even if your entry and direction are good, you are risking to be stopped out just to see the price precisely taking off in your direction... without you on board.