We recently featured an article titled The Key to Making Money in Your Forex Managed Account; in this post, we explored how forex money managers and fund managers can grow their managed forex accounts for their investors. In this post, we take a different perspective and look at things from the perspective of a newcomer to the forex market.
Forex trading is undoubtedly challenging, but it’s not impossible. Anyone with the right attitude and aptitude can acquire the knowledge, develop the skills, formulate a strategy and follow it. Being able to grow a forex trading account is not an easy task. However, if you can respect the five simple tips in this article, there’s no reason that you can’t become profitable.
Every new forex trader dreams of growing their forex trading account to a size that they can make a living off, but having the self-discipline to effectively follow-through from start to finish, is an entirely different story.
In this article, we share five money management tips that can help you to grow a small forex trading account cautiously. If you can follow these tips, you may be on the right path towards becoming a full-time trader.
1. Track your performance in percentage risked not dollars
This tip requires an adjustment to how you perceive profit and loss. Naturally, when you think about trading forex, you think about making money in dollars, euros or pounds. Unfortunately, that perception will crush your ability to grow your trading account,
Consider someone who claims to have made $10,000 trading forex in a month. It might sound like a great result. What if that person had managed a trading account with a starting balance of $1 million? It sounds less impressive now, right? Technically that’s only a gain of just 1% of their starting account balance.
$10,000 a month is still a healthy amount of income, but relatively speaking, it sounds trivial, considering such a significant amount of capital was required to make it.
By assigning dollar values to every performance metric, it prevents you from comparing vital statistics and scaling up your trading strategy in the future. The habit of tracking everything in dollars or pips is entirely arbitrary.
When growing a small trading account over time, it’s necessary to get your risk management in check. To do this, you should follow your account in terms of percentage risked/gained rather than in Dollars.
A common technique recommended to new traders is that you should only risk 2% of your account balance, meanwhile, targeting at least a 1-to-3 risk-to-reward ratio. That means your trading strategy will decide how many pips your stop-loss should be placed away from your entry point. Your order size will also be adjusted accordingly on every new position, so that position size and stop-loss distance will ensure you’re never risking more than 2%. Placing trades with a 1-to-3 risk-to-reward ratio means you can work with a 35% win rate and still make money.
2. Don’t set weekly profit targets
When trying to grow a small trading account carefully, patience is essential. As much as any trader would like consistency, the bottom line is that you can never control how the market plays out from one day to the next. In one session, you may get an overload of trading opportunities, while during the following session, you may get none. You need to be prepared for good days and bad days.
If you set weekly, daily or even monthly profit targets, you’re likely to talk yourself into following trade setups that quite honestly, don’t exist. Low quality, trade setups that you may otherwise have not seen as an opportunity if you hadn’t felt compelled to meet a target.
Growing a trading account is not a consistent process; it’s somewhat like a game of snakes and ladders. You can’t expect to go from a $1,000 trading account to a $100,000 trading account in just a few months by following the 2%/1-to-3 risk-to-reward rules outlined above. Not to say it can’t be done if you up the ante and get lucky, but forex trading is not about luck.
You should remove any pressure to meet regular short term profit targets and just focus on your trading strategy. This simple tip will prevent you from placing a lot of questionable trades.
3. Don’t make unnecessary withdrawals from your trading account
By avoiding excessive withdrawals from your trading account, you’re able to compound your profits and begin trading larger position sizes without ever changing the risk parameters of your strategy.
If you’ve followed tip number one and are tracking your progress in percentages rather than dollars, then you won’t need to change anything to scale up your trading strategy via compounding. Just continue to risk 2% while targeting 6% and over time, you’ll witness your gains rise linearly.
The bottom line is that you can’t grow a small trading account if you’re consistently eating into your small profits by making withdrawals. To succeed, you have to trade bigger lot sizes with bigger profit targets. Never underestimate the power that compounding the earnings on your forex trading account can have on overall growth.
4. Don’t focus on the size of your trading account
Unless this is the first article about forex trading you have ever read in your life, you’ve probably already heard that the foreign exchange market is the largest and most liquid in the world. The advantage of having all this liquidity at your fingertips is the ability to scale up your trading strategy almost infinitely. No matter how successful you become, there is no reality where banks won’t be able to fill your trades.
One of the most important things when trading a live forex account is the process you follow, rather than the outcome. Even if you’re recklessly applying leverage on a small trading account, you’re never going to make enough money to live from trading forex consistently. To reach that point, you have to trade your small forex trading account like it’s a large account.
By focusing on the methods and not the size of your trading account, when you start to make consistent gains on a small account, you can apply that same process to a larger trading account and theoretically get the same results. If and when you grow your trading account or increase the balance of your trading account, all you need to change is the size of your orders.
When it comes to the forex market, scaling up is never an issue if you’ve got the discipline to stick to both your trading and risk management strategies.
5. Always have other sources of income
The final tip on how to grow a forex trading account has nothing to do with trading forex. To really focus on trading decisions, you need to have other sources of income. By not relying on your forex trading income, you essentially remove the pressure to make money. As mentioned in tip number three, there is no consistency in forex trading.
Your motivation to trade forex might be to escape a job you hate. However, one of the worst things you can do as an aspiring forex trader is to rely on gains from your trading account. Don’t start trading with the expectation to make a living from the get-go. From a psychological perspective, this is one of the worst decisions you can make. The pressure to perform will prevent you from achieving. Ultimately, you will either push yourself towards making poor trading decisions or start taking money from your account and therefore diminishing your ability to compound and scale the trading account over time. Whichever way it goes, you’ll be negatively impacting your ability to grow as a trader.
Final thoughts on how to safely grow a forex trading account
By following these five simple tips, you should be able to confidently start your journey toward safely growing a forex trading account. These tips may seem trivial, but they are incredibly powerful. An overwhelming amount of your ability to succeed as a forex trader is influenced by risk management techniques and your psychological state of mind.
If you want more tips on how to become a successful forex trader, read our article with five keys to successful forex trading.