Rapid % Compounding

[aiywqexr47]

In the past year of trying to find my trading style and somehow hitting the big bucks, there is something that struck me.

We are told that part of the success is finding your own time frame. I've also repeatedly seen mentioned in many sources that going for higher frames or longer-term is less stress and safer for your account. I didn't entirely believe this. Then around late Oct, I'd found a thread expounding on some whiz kid's hyperscalping method (http://www.trade2win.com/boards/general-trading-chat/44624-55000-one-month.html) and that provided me with a very different perspective on trading.

Further digging around and a couple months of experimentation later, the secret to exponential growth of one's account on low risk has some very simple mechanics:

- Lots of trades. Large or small doesn't matter.

- Win % can be as low as 50%.

- R:R of 1:2+ is preferable.

- Use that leverage!

- Risk per trade can be kept to 1 - 2% of account.

The secret to exponential growth is simply to compound each trade and let them scale up into the stratosphere. So:

- 1% net per day nets you 700% YOY return.

- 2% net per day nets you 5000% YOY return.

- 3% net per day nets you 37000% YOY return.

And so on. Crazy numbers.

Some might say scalping is high-stress and undo-able for many. I sort of agree. I've given it a shot and 200+ trades per day is extremely exhausting. The market is also not always in the mood for that kind of volatility.

However, taking a leaf out of scalping's best strength is very feasible, and that's its extreme ability to compound returns. Let's say you make only 10 trades per day. Winners give you 1%, and losers are .5% of account. With a 50% win rate this nets you 2.5% daily. One year of this, and you're off on the beach sippin' those martinis.

Anyway, this is all to point out that even just 1% gain per day/week is not to be sneezed at. If you can harness the exponential power of trading, then that's all the mechanics you need behind money and risk management. The rest is psychology and a consistently profitable method.

[ajzohrnd77]

I'm not a scalper but more of a swing trader although much of the bullet points you mention are rules I use in my trading. Just to clarify for anyone that may be new to trading the 1-2% "risk" should be thought of as where you place your stop-loss, not that you would only have 1-2% of your account tied up in a trade - after all you're not a mutual fund or an index fund. The 1-2% should be the loss threshold on the trade at which point you capitulate, cut your losses, and try another trade.

Also, I concur with the use of leverage. This can be extremely beneficial in a favorable market environment such as the one we just experienced, or are still experiencing depending on your forecast for the near-term future. The past six to eight weeks have presented copious high probability set ups to the point where I was compelled to lever up on several concurrent trades at a time.

I do want to caution against ignoring the threat of a series of runs to the downside. Granted this is what limiting losses to some nominal, small % of your total capital is supposed to guard against but it is important to recognize the difficulty in compounding returns particularly when talking about 1,000X returns in a year. For example, a series of 10 losses in a row at 2% of your capital base per loss is -21.9% (e.g. 1.02^10 - 1). In a tough market going on a bad run is not inconceivable. I discussed the importance of picking your timing wisely on the macro level in another thread. While some traders are adept at going long and short with ease so that they are always invested I prefer going long to short and even in markets with a bias to the up side it's only those with very favorable conditions (e.g. the last 2 months) where I feel comfortable trading aggressively (e.g. levering up) to capitalize on a rather rare macro environment. Because of these factors I think caution is warranted when talking about thousand-fold increases in financial capital.

[akehuhar]

All good points, MCD. Loss streaks are hardly unheard of in this business and should be avoided like the plague. Dial down the risk until you're back on track if in a rut. I use a 2% hard stop, but manually limit myself to 1% or less going by what I see on screen. It does a lot of good to keep losses smaller than your max risk % rather than simply let it hit your stop. You can then let winners run for high R:R. If you have excellent entry selection, then this just increases the win% as well.

Anyway, another point I forgot to mention was the benefit of this to those of us with small accounts starting out. It has several implications:

1) You don't need to trade ES on $500 base capital or FX on 500:1 to "get going".

[albertahi1]

Going with the market is another good point. It is always easier to swim along the river stream than swim against it. If I am ever uncertain which direction the stock will go, I just tend to bet based on the market's overall direction.

[AlbertRict]

Not sure I agree with this. I think both styles of trading require a different approach and skill set though. Human nature sort of leads most people to the ADD type of 200 trades a day though :ridinghorse:

Swing trading, the work is done when the market is closed.
Intraday higher volume is done during the hours of the market.

Like an FPS or RTS vs a non clocked game of chess....