Thursday, March 5, 2015

Compound your profits


Every year hundreds and thousands of new traders come into the forex arena looking for riches, trading 24 hours a day shooting for 50% a week and find their accounts blown within the month, most of which become too demoralised to ever even consider depositing more funds and pulling the trigger on another trade, their trading career is over before it had even begun.

Those that become successful long term traders understand the power of compounding gains for huge eventual profits, they start small, aim low and believe it will all pay off in the future, however most human beings are born with a natural greed, an emotion that runs so strong in most people's veins that the thought of 2 - 3% a week sends shivers down their spine and they become part of the above club, the 95% of unsuccessful traders.

As fun as it is to dream of doubling your money every fortnight it is important to be realistic of what to expect in terms of profit in both the short and the long term, the reality is a consistent weekly gain of 2 - 3% over the period of a year is no easy feat for even the best of traders however it is achievable for the few successful traders.

To most the idea of making a 2 - 3% weekly gain isn't all that exciting, especially when compared to claims of 20,30 and even 40% returns a week that are often thrown around on the internet but the moment we add compounding into the equation those small weekly figures can amass to some huge yet realistic sums of money.

For those that don't understand the concept of compounding gains or interest it is the exponential growth of a sum of money by continuously reinvesting all profits, so although the profit percentage remains the same the actual sum of money grows at a very rapid rate.

As a very basic example lets assume we have $1000 in our trading account.
If we were to make a 10% return every month for a year and not re-invest any of it we would have made a 120% return equating to $1200.

If however we compound our gains every month we will end up with a much larger sum which i'll demonstrate below.

month 1 - 1,000 + 10% = 1,100
month 2 - 1,100 + 10% = 1,210
month 3 - 1,210 + 10% = 1,331
month 4 - 1,331 + 10% = 1,464
month 5 - 1,464 + 10% = 1,610
month 6 - 1,610 + 10% = 1,771
month 7 - 1,771 + 10% = 1,948
month 8 - 1,948 + 10% = 2,143
month 9 - 2,143 + 10% = 2,357
month 10 - 2,357 + 10% = 2,593
month 11 - 2,593 + 10% = 2,853
month 12 - 2,853 + 10% = 3,138

Total gain in percentage - 213.8%
Total monetary gain - $2,138

Now lets take it one step further by using our yearly return and compounding over a 7 year period with a starting balance of $1000

Year 1 - 1,000 + 213.8% = 3,138
year 2 - 3,138 + 213.8% = 9,847
year 3 - 9,847 + 213.8% = 30,900
year 4 - 30,900 + 213.8% = 96,964
year 5 - 96,964 + 213.8% = 304,273
year 6 - 304,273 + 213.8% = 954,811
year 7 - 954,811 + 213.8% = 2,996,198

Total gain in percentage - 299519.8%
Total monetary gain - $2,995,198

How is that for a retirement plan?  7 year plan.

Now I think I can safely say that would be extremely impressive to anybody!
With the power of compounding gains figures like that eventually become realistic in the long term if you can remain consistently profitable at even 2 - 3% a week!
So if you really want to be successful aim for 2% a week instead of 20%, compound your gains and begin building your future!

You can use this concept for your expert advisors as well.  Set a weekly balance limit that will cut off the EA from trading until the next week.  Also, set a profit target for your EA so it will close all positions or at least set stops to protect that profit.  This is one way of controlling your EA's in MT4 so that they will achieve your goals..  It will also aid to get you out of the market when things start to change.

Disclaimer

The information presented on this site is for educational and entertainment purposes only. This site contains no suggestions or instructions that you must follow, do your own research and due diligence before committing your cash to the markets. Your on your own.