How Compounding Works in Trading
Compounding is the process of reinvesting your profits to generate additional returns on top of your original capital. Instead of withdrawing profits, you add them to your account balance and use the larger capital to generate even more profits over time.
Example Calculation
- Month 1: $10,000 + 5% = $10,500
- Month 2: $10,500 + 5% = $11,025 (not $11,000)
- Month 12: $17,959 (vs $16,000 without compounding)
Risk Management Tips
- Target realistic monthly returns (3-10% is professional)
- Risk only 1-2% of your account per trade
- Consider withdrawing 20-30% of profits periodically
- Be patient - compound growth takes time to accelerate