The Secret to Growing Your Forex Trading Returns
Do you know that even if you have a profitable forex trading system, you can still lose huge amount of money trading forex? Contrary to what many traders believe, a profitable trading system is not the only thing that will ensure successful trading forex. Practicing forex trading money management is actually the little known secret to keeping your account safe and exponentially growing your returns.
So what exactly is Forex Trading Money Management? Basically, it is the amount that you should risk on each trade. There are many money management strategies you can find. Among the most popular and you may have heard about is the 2% rule. This rule states that one should not risk more than 2% of their capital on one trade. Many get confused with the 2% rule because of its definition. Most traders confused margin with risk per trade. To make it clear, here’s an illustration. If you are using this rule, you need to size your position in a way that you won’t lose more than 2% of your forex trading capital. If your stop is 10 pips away, for example, and 2% of your capital is $200, then you can only get 2 contracts.
Just like any other rules, the 2% rule also has its own limitations. Many traders follow this rule religiously not knowing why they are doing it. If you want to minimize the risk and maximize your profits, then you may need to keep your risk per trade to between 2% to 4%. Actually, you can even go up to 3% or 4% depending on how you can tolerate the risk without increasing your risk greatly.
The 2% to 4% model is a geometric money management technique that is the most efficient in growing one’s forex trading capital. People traditionally apply money management using fixed contract sizes. This is good for those small accounts. However, this is not very efficient.
You may ask why this rule is so powerful. The reason is because this 2-4% rule allows the trader to apply compounding power to their trading. When you gain profits, reinvest over and over again. This shall make your trading account grow exponentially. In forex trading profits, an exponential increase is better than linear increase.
You can apply the 2-4% rule in two ways. You can either update your position sizes by the end of regular time intervals or update it at specific milestones of profit or loss. Whether you choose the first or the second way of applying the 2-4% rule, it is clear that this is a powerful strategy as it creates the safest and also the fastest growth in trading account.
To apply the 2-4% rule successfully, you need a profitable forex trading system. Once that these two are put in place, there would be nothing to stop you from creating passive forex trading income that is growing over time.
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