Podcast:

The Amazing Power of Compounding and Using it to Your Advantage as a Forex Trader

In this video:

00:47   Huge effect to the overall performance

02:20   The potential of compounding

05:39   2.1% return gain just from just 5-minutes work

 

How to Use the Power of Compounding to Your Advantage

In today’s video and podcast I want to share some really exciting information with you regarding the power of compounding and how it can really help you with your Forex trading results. So let’s get into that right now.

Hi traders it’s Andrew Mitchem here, the owner of The Forex Trading Coach. Today is Friday, the 22nd of August and I want to talk about compounding.

I’ve had an email come through from Don and he said “Andrew, can you just talk about compounding and how I can use that to my advantage as a Forex trader.” It’s something that I also shared on a live webinar with my clients just last night.

When you start talking about the power of compounding it just makes you realize just how, (if you’re using in the right way) how it can make such a huge effect to the overall performance that you achieve as a Forex trader. So I’ve just run through a few different scenarios on a trading calculator that I have.

I’ve assumed that you’re taking 25 trades per month. So all the figures that I’m about to quote assume  25 trades per month so just over 1 per day of the trading day and also using 0.5% gain per trade.

So if you had a 50% win rate in your trading strategy, so it means obviously that you’re actually losing half the trades that you take and of course winning half the trades that you take. If you had that 50% win rate with the 2 to 1 return on each trade. So for example if you were risking 50 pips to make a 100 pips or risking 25 pips to make 50 pips whatever it might be you were turning twice the amount that you are risking. So if you had a 50% win rate  with the 2 to 1 reward to risk ratio, that’s going to give you (assuming that you do that consistently) that’s going to give you around a 6.3% monthly return, compound that and assume that you’re doing that evenly throughout the whole each month of the year. That’s going to give you just over a 100% return on your account which is pretty spectacular.

Now there’s a lot of assumptions in these figures as assuming that everything is even and everything are consistent which of course in reality is not. But just to give you an idea of the potential that can be achieved using the power of compounding.

As you have profitable trades your account grows with compounding. The great thing about it is you’re actually compounding on your gains.

The thing in reality that I also liked about it is that if you have losing trades and losing weeks and loosing months even because you’re using a set percentage of your account, you’re actually losing less as your account goes down but if you’re a good trader and you make more money, with compounding you can then grow that substantially greater of course.

So using those figures 50% win rate, 2 to 1 reward to risk on each trade (and a 0.5% account risk per trade) gives you a 6.3% per month. Take that out to a year around about a 100% gain.

If all of a sudden you had a 40% win rate. So you’re losing 6 out of 10 trades but the same return per trade. That’s now giving you a 2.5% monthly return; compounded out, that gives you about a 34% annual return – still exceptionally good.

But if you stick at your 40% win rate so only winning 4 out of 10 trades but all of a sudden instead of a 2 to 1 return you’re now at a 2.5 return per trade (and a 0.5% risk per trade) that suddenly gives you a 5% monthly return and about 80% annual return. So you can see the difference there.

You’re still losing 6 out of 10 trades. It’s something a lot of people come to me and they say, “Andrew,