Welcome to this quick educational video on Compounding interest in trading.
Today I want to break down the benefits of compounding a trading account while keeping good risk management at bay.
The reason why compounding interest is so lucrative is due to investing interest on top of interest, and your trading account can grow much faster than traditional investment returns.
The important note is that, by having strict risk management rules, proper trading plan, the account can grow over time. But why do many traders fail to do so ?
Let’s take a deeper look into this:
Many new/beginner traders often get involved in trading due to its profitable potential.
However, most of them do not learn about risk management, trading psychology on mindset and emotions.
They tend to over trade, over leverage their accounts in hope to double it in a short period of time.
This almost always leads to traders to blow their accounts, and re-deposit more money to “chase/revenge” their losses, and the cycle continues.
The truth is, growing the account by compounding can eventually double a trading account, but only in time and with strict risk management rules.
However, the greed, emotion and mindset often become the tread stone for the traders’ success.
It’s important to understand that having a consistent, sustainable approach in trading can lead to profits and growth over time, but it’s not something that is instantaneous, which is what most new/beginner traders often misunderstood.
This can be due to social media, and lots of typical trading “guru” out there promising guaranteed results and easy money.
Take a step back and think about compounding interest in time and scale. 5-7.5% return per month may not seem much for a small trading account, but it is sustainable and consistent by not over-risking and over-trading.
In time when the account is at a larger scale, a few % return with compound effect in a year can generate very sizable return and growth.
In today’s trading industry, there are many prop firms out there that allow you to trade their funds, if you can be consistent and sustainable.
Understand these firms are not looking for traders to double their larger capital, rather, to have consistent return and proper risk management.
When you can prove you can be consistent to compound a small account, then when you actually do trade a larger account, the % return would be the same.