A little hope for new Forex traders

Quote from late apex:

Cute. Ever hear of "compounding"?

It's not the ability "to trade in such small lot sizes" that matters for "increased profitability" in forex. It's the combined power of these 2 interrelated but distinct elements:

1. The ability to increment trade size by sufficiently small amounts... whether the trade size order of magnitude is in the neighborhood of $75 or $7,580,000.

2. The ratio of the account size to the minimum trade size (MTS).

1. --> Rule 1: The more frequently you can compound your short-term (positive) returns, the greater your long-term returns, ceteris paribus.

This rule is a mathematical certainty and fairly well known. The ideal, optimal case is to be able to compound after every closed winning trade, which is only possible with unit trade sizing. That gives you perfectly geometric (exponential) long-term returns.

On the opposite end of the spectrum is when you are forced into waiting until many closed winning trades -- typically over days, weeks or longer -- before compounding is possible, given almost any conceivable money management / position sizing method. Something most forex traders have to put up with. You've found an edge, yet still have to settle for lowly arithmetic (additive) long-term returns. Nice...

2. --> Rule 2: If your account size is less than 3 times -- preferably 4 times -- the MTS, then you're not taking advantage of the power of compounding to its fullest possible extent. Effectively, you're willingly throwing away already earned profits.

This rule is little known. Ignore it at your own financial peril, as most forex traders do. If you're trading mini-lots and you've got less than $30,000 - $40,000 in your account, you've fallen into that hidden trap. Nice... again.
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Absolutely correct...very well put.
 
Quote from late apex:

1. --> Rule 1: The more frequently you can compound your short-term (positive) returns, the greater your long-term returns, ceteris paribus.

This rule is a mathematical certainty and fairly well known. The ideal, optimal case is to be able to compound after every closed winning trade, which is only possible with unit trade sizing. That gives you perfectly geometric (exponential) long-term returns.

. . .
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Is this the same as saying that you'll make a ton of money if you make winning trades back-to-back-to-back and so on, until the string of successful trades is really long? That's kinda what I figured the thread starter meant when he suggested retail fx offers exponential profits if and when trades are increased incrementally in size.
 
Quote from nazsmith:

However, the forex market inherently provides greater chances of profitability using a sound strategy and discipline.
Math is a science that no one can deny. If you use a firm that allows you to buy/sell in 1 unit increments, you can watch your profits increase exponentially.
I've invested/traded stocks for a little over a decade. In terms of profit, predictability, and analysis (whether TA or FA), there is no comparison. A goal of 10% (or any percent) compounded each month is actually more feasible in FX than the stock market. Do the math: 10% compounded for 6 months is a great annual return.
Good luck to everyone.
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This was the assumption to which my reply was directed. There is no evidence that smaller lots contributes to a more "feasible" percentage goal in FX versus stocks -- if it's any easier in FX, it's due to pure leverage, plain and simple. But maybe I don't understand the concept of trading "1 unit" increments -- does that just mean a fixed percentage of one's account?

When I posted I assumed he was referring to some type of martingale system in which one completely throws up one's hands in attempting to time the market -- a concept a number of fx traders seem to think is impossible. If that was not his intention, then nevermind my post.
 
I think that the easiest way to look at this is from the other direction. You surely would increase your chances of compounding losses by increasing size after losing trades, so it works the other way as well
 
ps -- this isn't the treasury markets we're talking about here; it's hard enough at times to get a decent execution on any part of one's position, much less count on being able to things granularly.
 
Quote from Chood:

Is this the same as saying that you'll make a ton of money if you make winning trades back-to-back-to-back and so on, until the string of successful trades is really long? That's kinda what I figured the thread starter meant when he suggested retail fx offers exponential profits if and when trades are increased incrementally in size.
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Apologies for being elliptical: The critical, deciding factor of this thread's proposition for exponential profits is the trader's ability to make winning trades back-to-back-to-back and so on, not (or rather than) the ability to size trades incrementally. Thus, the really important topic is this: what conditions are most conducive to profitable forex trading? I suggest that an honest market is the paramount condition. The rest is academic without that.
 
I logged back on to see how many inevitable flamers this would inspire to write. I'll address their statements first in the same way:

Yes. I am an authority on Forex. Naz Smith. I've learned all the intricacies about the FX market. Maybe compounding returns works differently in FX than the rest of the univese. Either way, remember that Naz Smith is an authority on Forex.
I was also paid (WTF?) to post that. Even though I didn't mention any firm, product, etc, somehow someone thought it was such a good idea to pay me to post and I accepted. Again, WTF?

Late apex, you're the man. You understand compounding and why 1 unit increments are advantageous. A simple (hopefully) example:

Trader A needs 10000 units to make a trade. Trader B needs 10 units to make a trade. Starting from 10000 units, Traders A and B both make a profit to purchase an additional 5000 units. The next trade, Trader B trades 15000 units; Trader A can only trade 10000 as he does not have enough to trade the next increment. Traders A and B both generate the same profit (50% in this case). Trader A now has 20000 units, whereas Trader B has 22500.

I'm glad the post did inspire someone other than flamers. While some may want to deny I am an authority who is paid for my testimony, you can't deny math:)
 
Wow, this is the equivalent of saying if I could use all my money to buy 6397 shares of yahoo on the next trade compared to someone else who only buys 6300, I would make more money -- therefore, the extra 97 shares is key to my exponential gains. Gotcha.

Trust me, by the time anyone gets to the point where they can expect steady "exponential" gains, his account will be large enough to make this issue moot.
 
To Illiquid:
Yes, the yahoo statement's somewhat right. Late Apex already stated it (excellent post! Should that be required reading?),but I knew my simple example could garner more understanding.
Maybe the popular denotation of "exponential" has people thinking in terms of millions. "Exponential" simply means multiplying something to the power of something. It has nothing to do with account size per se. $1 to $1.50 to $2.25 to $3.37 is an example of "exponential gains." Someone's savings account at a bank generating only 1.5% annually will grow exponentially. That's the definition; there's nothing to debate.

--Naz Smith aka "3 month authority" :)
 
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