What is Compounding?
Compounding
Forex Trading Glossary
Quick Answer: Compounding reinvests profits so that gains begin generating additional returns, accelerating long-term growth.
What is Compounding?
Compounding occurs when you reinvest profits so gains themselves start generating returns. In trading, consistent compounding transforms modest monthly returns into significant account growth over time.
Compounding Formula
- Account value: Starting capital multiplied by (1 + return)number of periods.
- Frequency matters: Monthly compounding accelerates growth compared with yearly compounding.
- Consistency: Small, steady gains often outperform sporadic large wins.
- Risk control: Deep drawdowns break the compounding curve.
Focus on Process
Protect capital, maintain consistent risk per trade, and let math work rather than chasing outsized wins.
Applying Compounding
- Risk budgeting: Keep percentage risk per trade constant as equity grows.
- Withdraw strategically: Avoid frequent withdrawals that interrupt growth.
- Track equity curve: Monitor rolling returns to stay disciplined.
- Use automation: Position-sizing calculators remove manual errors.
Related Terms
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