Investors have a tendency to think about their investments in terms of ROI (return on investment), ROE (return on equity), and so on, but there is one measurement that is easy to understand even for the financially illiterate folks – and that is, the time needed to double your money.
However, the time it takes do double your account depends on many factors, such as your risk profile, reward-to-risk ratio of trades, and the way you manage open and profitable positions. Eventually, if everything lines up correctly, you could be on your way to bragging about having “doubled your account” at the next party.
In this article, we’ll show you both the safe and speculative way to double your account with Forex trading. The amount of leverage available in the Forex market is unprecedented and unmatched by any other financial market, which dramatically increases your potential profits. But be aware, as trading on leverage increases your potential losses as well.
The “savings account” way
Opening a classic savings account in the currency of your choice is the simplest way to indirectly participate in the Forex market. You don’t need to follow charts, trade, or calculate your risk per trade. But if your objective is to double your investment with this approach, be prepared for a long waiting period. Let’s say you’re based in Europe and decide to invest in a savings account with high interest rates. Among the major central banks, New Zealand has currently one of the highest interest rates which also affects the interest rate of commercial banks, which average around 2.5% annually – more than double that of Germany. Still, it would take around 25-30 years with compound interest to double your initial investment, considering the interest rate doesn’t change over time. However, you could also profit (or lose) from exchange rate fluctuations of the New Zealand dollar vs. the euro, so you need to wisely decide in which currency your savings account will be denominated.
The classic way
Old-school traders who started in the business a few decades ago, when there was no leverage, trading on margin, minute-charts, and real-time Forex news, used the classic way to trade and, eventually, doubled their account. Without the use of leverage, risk becomes significantly lower, as do the potential for profits. With the average daily price movement of 1% for most currency pairs, it would take a load of trades and time to see a 100% increase in your trading account. That’s why, just like in the good old days, position trading would be an attractive option to consider. Currency pairs tend to move in trends, and holding a position for months (or years) would see a high return assuming the trader analysed the market correctly. Still, position trading lacks both the opportunities and excitement that short-term trading carries.
The concepts of risk per trade and reward-to-risk
Before we go on with the safe and speculative way of Forex trading, let’s explain some important concepts. As you already know, with increased risk come increased payoffs. It’s the single most important factor that influences the time it takes to make a 100% profit. If you aren’t a risk-taker, you can still double your account, but it will take longer.
The reward-to-risk ratio also influences the number of trades needed to double your account. Theoretically, taking trades with a R/R of 2, and a risk per trade of 1%, takes 50 trades to double your account. Compare this with a R/R of 4 and a risk per trade of 2%, which takes only 10 trades to double your equity! Although higher risks increase the return, you still need to pay attention to your overall risk exposure to avoid blowing through your account instead of doubling it.
The way you manage your open positions also adds to the chances of making larger returns. Are you comfortable with adding to your winning positions, i.e. scaling in? The previously mentioned factors, and a few others, can be grouped in two ways to double your account: the safe way, and the speculative way.
The safe way
If you’re a risk-averse trader, this approach may be right for you. In essence, it’s based on a conservative risk per trade and reward-to-risk ratio that helps in capping the maximum drawdown of the trading account at a reasonable level, while simultaneously offering trading opportunities to grow your equity. Nonetheless, it will take time.
Even with a winning streak, a 1% risk per trade, and a 1.5 R/R ratio, it would take at least 47 winning trades in a row for a 100% increase of your account. While some traders would appreciate the low risk of this trading approach, it’s still suited for the more patient traders.
The speculative way
The speculative way of doubling your account is also the riskiest of them all. Contrary to the safe way, it assumes a higher risk per trade and reward-to-risk ratio. Risk-takers could find themselves attracted to this trading approach, but they still need to assure that all principles of money and risk management are strictly followed in order to see a 100% increase in equity. With a speculative approach to trading, assuming a 2% risk per trade and an R/R ratio of at least 4, a trader would only need around 10 winning trades in a row to double their account. However, losing the same amount of trades in a row would amount to an 18% loss on equity.
In addition, trading with an R/R ratio of 4 would be difficult to maintain on an intraday basis, as stop-losses would need to be very tight compared to the expected take-profit level. Taking into account that most pairs trade in a 100-150 pips intraday range, your stop-loss should be around 25-40 pips.
What is the best way to double your account?
Which approach suits you best, considering the advantages and drawbacks of each? The best way to double your account depends on the individual preferences of each investor. A savings account denominated in a foreign currency carries both annual interest payments and the possibility of exchange rate gains if the currency moves in your favour, but takes the longest time to double your account. The classic way of trading, without leverage and over a longer term, doesn’t take much time compared to shorter-term trading on leverage, but also lacks many trading opportunities of short-term trends and price corrections.
For investors who want to double their account faster, trading the Forex market on leverage and over shorter time frames brings the largest potential of profits. If opening a savings account or position trading is too slow for you, yet you still don’t want to take excessive risks, the safe way of trading may be the best for you. Finally, risk-loving traders who want to double their account in record time would be better suited with the speculative way of trading, which includes riskier speculative trades, with higher risk per trade and R/R ratios.