Among many successful and winning risk management strategies, compounding is undoubtedly one of the most effective and powerful. This is the quickest way to grow a hundred-dollar account into a ten-hundred-dollar account. Compounding in trading assures faster and bigger profits in comparison to the loss percentage. This is without a doubt the safest and most sustainable forex trading strategy to minimize losses and overcome those with a bigger profit. This strategy requires a tight and fixed risk-to-reward ratio of 1:2 – 1:3. The RRR of 1:3 is the best for the asymmetric compounding trading strategy.
Although this seems like a perfect risk-management strategy to earn and grow your trading balance, this is a short-term strategy to implement. Like a snowball effect, a compounding trade starts with a small risk, but as it rolls down to the hill, the risk percentage gets multiplied. Most importantly, to note that the probability of losing BIG is definite if anyone uses compounding for the long term. Among the few compounding techniques in trading, we will look at Asymmetric Compounding as the most useful risk management strategy in trading here.
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Asymmetric Compounding in Trading:
Asymmetric risk is the concept of taking a risk that will provide a greater return than the risk taken. The winning value is multiplied by the relation to the previous trade in asymmetric compounding risk management strategies.
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Conditions:
1. Learn how to trade and build precise market reading capabilities;
2. Dependable and profitable system;
3. Open trade one at a time, no overlapping;
4. 1:2 / 1:3 RRR;
5. Two consecutive winning trades to overcome.
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Normal Trading System:
Let’s look at a trading scenario with a 1:3 RRR, and 1% risk per trade:
— Take a 1% risk trade, win and gain 3%, save the profit;
If you lose the trade, then (-1%).
— Again take a 1% risk trade, win and 3% gain, save the profit;
If you lose the trade, then (-2%).
— Then again take a 1% risk trade, win and 3% gain, save the profit;
If you lose the trade, then (-3%).
As you can see, this is a safe way to trade and earn a small profit every time you take a trade. However, there is a fantastic trading risk management strategy to accelerate your profit amount. However, you must take bigger risks as the trade count grows.
Before jumping into details about this method, this is a gentle reminder that Asymmetric Compounding in Trading is not for long trades, but for short and minor trades.
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Asymmetrical Compounding Trading Strategy:
Let’s look at the case of the Positive Asymmetrical Compounding scenario with a 1:3 RRR and 1% risk per trade.
Scene 1: These are four winning trades,
Trade 1:
Take 1% risk. Win, and earn a 3% profit.
Trade 2:
The winning 3% and the original 1% risk = 4% risk. Win, and earn a 12% profit.
Trade 3:
The winning 12% and the original 1% risk = 13% risk. Win, and earn a 39% profit.
Let’s look at the case of the Mixed Asymmetrical Compounding scenario with a 1:3 RRR and 2% & 5% risk per trade.
Scene 2: These are two winning and two losing trades,
Trade 1:
Take a 2% risk. Loss, and down to (-2% account growth).
Trade 2:
The original 2% risk. Loss, and down to (-4% account growth)
Trade 3:
The original 2% risk. Win, and earn a 6% profit (2% account growth).
Trade 4:
The winning a 6% and the original 2% risk = 8% risk. Win, and earn a 24% profit (26% account growth).
Even though there are 2 losing trades, there is still a great profit opportunity to grow your account at the end of the day.
Scene 3: These are two winning and two losing trades (mixed).
Trade 1:
Take a 5% risk. Lose, and down to (-5% account growth)
Trade 2:
The original 5% risk. Win, and earn a 15% profit (10% account growth).
Trade 3:
The winning 15% and the original 5% risk = 20% risk. Lose, and down to 20% (-10% account growth).
Trade 4:
The original 5% risk. Win, and earn a 15% profit (5% account growth).
Even though there are 2 losing trades, there is still a good chance to grow your account at the end of the day.
Scene 4: These are two winning and two losing trades (mixed).
Trade 1:
Take a 5% risk. Lose, and down to (-5% account growth)
Trade 2:
The original 5% risk. Win, and earn a 15% profit (10% account growth).
Trade 3:
The winning 15% and the original 5% risk = 20% risk. Lose, and down to 20% (-10% account growth).
Trade 4:
The original 5% risk. Win, and earn a 15% profit (5% account growth).
Even though there are 2 losing trades, there is still a good chance to grow your account at the end of the day.
There will always be losses, but with the forex compounding strategies, the amount of profit can easily mitigate the minor losses. This is a steady method to increase the trading balance. However, as aforementioned, without solid trading knowledge and control over revenge trading, the best result will be obtained within a very short time for a trader.
