{"id":14511,"date":"2017-12-26T09:01:39","date_gmt":"2017-12-26T17:01:39","guid":{"rendered":"https:\/\/www.tradingheroes.com\/?p=14511"},"modified":"2024-04-02T00:47:14","modified_gmt":"2024-04-02T07:47:14","slug":"compounding-forex-profits","status":"publish","type":"post","link":"https:\/\/www.tradingheroes.com\/compounding-forex-profits\/","title":{"rendered":"Compounding Forex Profits: A 2,381 Percent Example"},"content":{"rendered":"

\"Compounding<\/p>\n

When you buy something through one of the links on our site, we may earn an affiliate commission.<\/div><\/p>\n

In a previous backtesting post<\/a>, I revealed the results from a backtest of Trending Outside Bars.<\/a><\/p>\n

That strategy yielded an average 75% win rate and an average 18% return on seven pairs, over about 16 years.<\/p>\n

Yeah, those results won't buy you a Ferrari any time soon.<\/p>\n

But I presented the data that way to make a point:<\/p>\n

It can be easy to give up on a trading strategy in backtesting<\/a> when you don't make huge return every year.<\/p><\/blockquote>\n

That can be a big mistake, as I'll demonstrate in this post.<\/p>\n

Reminder:<\/strong> Backtesting has its limitations<\/a>, but it is a great start for building a trading system.<\/p>\n

Most of the successful traders<\/a> I know attribute their success to backtesting, but there are different ways to learn to trade. Past performance does not guarantee future results.<\/p>\n

The Leverage of Compounding Forex Profits<\/h2>\n

You have probably read a lot about the magic of compounding Forex profits with a bunch of theoretical numbers thrown into a spreadsheet.<\/p>\n

That's a great start, but let's look at a real life example from a round of testing that I did.<\/p>\n

As I mentioned in the beginning, the results I presented only included seven pairs. Many traders test one pair, then they get discouraged that they only made 18% over 16 years.<\/p>\n

So they give up and move on to the next system. Welcome to the Trading Silodrome<\/a>.<\/p>\n

But they miss two important leverage points:<\/p>\n

    \n
  1. Compounding<\/li>\n
  2. Trading more pairs\/timeframes<\/li>\n<\/ol>\n

    Here's how that 18% can turn into 2,381%…<\/p>\n

    Test Results with Compounding<\/h2>\n

    After I did the test with seven pairs, I expanded the test to all 27 currency pairs that I want to trade live. This can potentially multiply the advantage of the system over several currency pairs. The results were quite good, but still not impressive without compounding.<\/p>\n

    This is a screenshot from my backtesting journal spreadsheet.<\/p>\n

    \"Backtesting<\/p>\n

    Again, averages can kill your motivation. The average return for all the pairs dropped to 12.81%. On the bright side, the average win rate increased to 77.33%.<\/p>\n

    If you added the returns, as I did above in the spreadsheet, you would get a sum of 324.32%. That could cause you to give up right now. 324.32% divided by 16 years is 20.27% per year.<\/p>\n

    Pretty good, but probably not what most traders are looking for.<\/p>\n

    However, that only shows you part of the potential of the system. You need to take compounding into consideration.\u00a0<\/strong><\/p>\n

    Before we move on, some of you will argue that this next result isn't accurate either because most traders will have to withdraw money<\/a> for living expenses, taxes, etc. Yes, that is true and you will need to build this into your calculations later. At this point, I simply want to demonstrate the full potential of the system. This can be the key realizing that you have a viable trading system, instead of giving up too soon.<\/em><\/p>\n

    Combine All Results<\/h2>\n

    The key to getting your compounded return is to put all of your trades into one spreadsheet, so you can create your own calculations. Doing this will also show you your maximum number of losing trades, max drawdown<\/a>, etc. That can be tough to visualize when you are only testing one Forex pair at a time.<\/p>\n

    In Forex Tester<\/a>, you can simply export your backtesting results to a CSV file, then import it into your favorite analysis software, like Excel.<\/p>\n

    \"Export<\/p>\n

    Then sort your file by trade open date.<\/p>\n

    \"Trade<\/p>\n

    Now you can set variables for your percent risk per trade and your starting balance. Then you can change those settings to see how that would affect your end result.<\/p>\n

    If you need help setting this up, here's how to do it:<\/p>\n