The Power of Compound Trading

Filed under: Learn Forex Trading |

 

Figure 1.

You have probably all heard of the term ‘compound interest’. This is when you have some savings, which earn some interest, and that interest is kept in your savings account to earn yet more interest. So for example, if you have savings of $10,000, and in year 1 you earn 3% interest, your savings would then rise to $10,300. Then in year 2, your bank is now $10,300 and you earn another 3% interest. This time, your interest is $309. Over a ten-year period, with the same rate of interest, your bank would rise to $13,439, which is interest of $3,439. If you had taken that interest out of your account every year, the interest earned would have been $3000.

This same principle can be applied to your forex-trading bank. If you risk $100 on every trade, and make $600 profit every month, then at the end of the year your total profit will be $7200. However, if you have a bank of $10,000, and you risk 1% of your bank on each trade, then you will begin again by risking $100 on every trade. At the end of the first month, you make a 6% gain on your account, which is $600, and your bank rises to $10,600. However, the following month, you again risk 1% of your bank on every trade, which is now $106. If you then make 6% gains every month, by the end of the year, your bank will rise to $20,121, which is a profit of $10,121.

 

After 10 years, the flat $100 risk on every trade with a 6% month rise will leave your with $72,000 in profit. Not bad, but not quite good enough to live off ($7200 per year). However, the system of using compound interest will, theoretically, after ten years, give you a total profit, with a 6% rise on the bank every month, of $10,353,904! If you don’t believe me, then do the math for yourself. Now that is the power of compounding!

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