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Is compounding necessary?

James_Bond
Nov 01 2012 at 13:54
556 posts
@myfxpt I agree. In any case, this question can be only answered once you're profitable, and since most traders aren't, they never get to it.

Gary Sharp myfxpt com
myfxpt
Nov 02 2012 at 19:36
345 posts
James_Bond posted:
@myfxpt I agree. In any case, this question can be only answered once you're profitable, and since most traders aren't, they never get to it.


Good point!

NickMcDonald (NickMcDonald)
Nov 16 2012 at 09:55
86 posts
I would say that it is definitely not necessary.

Once an account gets to 200% return it can be hard to manage emotionally. Fear and greed start to come into play and it will effect your trading.

I've seen it dozens of times with the great traders that join our trading room. They go well for 3 months, then tank.

If you start with a decent bank, then just withdraw your winnings you might find that fits better with your emotional resolve.

Find your passion and work hard
incometrader (incometrader)
Nov 16 2012 at 10:24
157 posts
If you're not compounding to some degree, you're making less and less as time goes on due to inflation. Compounding is the key to real wealth - ask Warren Buffet if he compounds his profits? Why limit your profits? Of course you should compound!

Ironman
Nov 16 2012 at 12:07
70 posts
But to answer the question 'Is compounding necessary?' it really depends on your bank.
If you have $100 to trade with and are happy with $20 in winnings per month, the question is no.

But for the 'risk of ruin'-discussions and percentages and so on - If you are trading with amounts that gives you a risk of ruin, you have to much at stake. Someone said that 'you should only risk so little that it almost seems like a waste of time to trade'.
Then you put the stress out and can concentrate on your way of trading.

xgavinc
Nov 16 2012 at 12:43
235 posts
Compounding is based on interest (and is derived from interest), you can't technically compound in trading, as the amount you are 'compounding' is put back as risk to cover drawdown and new positions. If you mean compounding in terms of increased position sizing, you are compounding your risk, not your capital. I doubt Warren Buffet compounds his profits (I think he will chuckle if he hears that), he would use his profits to obtain investments elsewhere, called risk capital, based on a percentage of portfolio. (so he could double his risk capital - bonus! or lose it all - in which case only losing a small percentage on his entire basket of portfolios.)

For every loss there should be at least an equal and opposite profit.
incometrader (incometrader)
Nov 16 2012 at 13:14
157 posts
FYI compounding is not necessarily derived from interest - it is the re-investment of any gain by any means to increase future returns on the initial investment.

Maybe the question should have been 'Is compounding necessary to maintain your profit percentage?'

incometrader (incometrader)
Nov 16 2012 at 13:20
157 posts
and I think Warren Buffet would have a good chuckle about all our comments - we're trading with what he'd term loose change 😁

xgavinc
Nov 18 2012 at 21:17
235 posts
incometrader posted:
FYI compounding is not necessarily derived from interest - it is the re-investment of any gain by any means to increase future returns on the initial investment.

Maybe the question should have been 'Is compounding necessary to maintain your profit percentage?'


I seem to be at odds with everyone lately, lol. Then I stand corrected, so if using the term synonymously with the term reinvestment, I guess you could refer to it as compounding if you were to continually reinvest your gains, and your current reinvested gains were more than your previous gains. Sound correct?

For every loss there should be at least an equal and opposite profit.
incometrader (incometrader)
Nov 18 2012 at 23:49
157 posts
xgavinc posted:
I seem to be at odds with everyone lately, lol. Then I stand corrected, so if using the term synonymously with the term reinvestment, I guess you could refer to it as compounding if you were to continually reinvest your gains, and your current reinvested gains were more than your previous gains. Sound correct?


That sounds good lol. But also you could re-invest 'some' of your profit rather then all of your profit and still be compounding (I think) I don't know anymore lol.

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