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Is compounding necessary?

ed_martin
Oct 10 2012 at 10:49
posts 3
As a forex trader, you would want to earn extra profit in trading. If you wanted to get higher profit, you must set higher capitals for your trading. come to think of it, the higher the capital, the higher the chance of earning bigger profits. Several traders once told me to use compounding. Is compounding really necessary to make a lot in forex trading? Share your insights.

aspiretrader.com
Oct 10 2012 at 21:04
posts 20
SaltyWaters
Oct 10 2012 at 21:55
posts 247
If you don't compound and you don't increase the lot size indeed your risk is reduced.

When compounding the risk will be the same as when you started all along the way regardless.

It's only risky if you do the math wrong and your compounding formula is screwed up.


James_Bond
Oct 15 2012 at 07:31
posts 556
As with all other things, you must use compounding when needed and according to your risk preference.
As Einstein said: 'compound interest is the greatest mathematical discovery of all time'.

If you have a profitable system and are not in a rush to withdraw your profits, then compounding would definitely speed up your profits, although this isn't a must. Best way is to experience it on your own - try compounding your profits for a month and see the difference.

ed_martin
Oct 19 2012 at 07:20
posts 3
SaltyWaters posted:
If you don't compound and you don't increase the lot size indeed your risk is reduced.

When compounding the risk will be the same as when you started all along the way regardless.

It's only risky if you do the math wrong and your compounding formula is screwed up.



I agree. Following a right formula would be the better way to practice compounding.

ed_martin
Oct 19 2012 at 11:49
posts 3
James_Bond posted:
As with all other things, you must use compounding when needed and according to your risk preference.
As Einstein said: 'compound interest is the greatest mathematical discovery of all time'.

If you have a profitable system and are not in a rush to withdraw your profits, then compounding would definitely speed up your profits, although this isn't a must. Best way is to experience it on your own - try compounding your profits for a month and see the difference.


Thanks for your insight. I think compounding is a great idea to gain capital quickly but one must be aware of the risks that goes along with it.

I believe it would be better and safe if one would set aside a profit and then try compounding some of their money just to avoid losing all the investment.

Vader FX (incometrader)
Oct 20 2012 at 07:19
posts 157
Personally I think compounding is a great idea, but not at a rate of 100%. So if you had an account of say 10k and traded a lot size of 0.1, and built your account up to 20k, to have a compounding effect and reduce risk, rather then increase your lot sizes to 0.2 you could increase them to 0.15 (50% compound rate) So in short, compounding at a rate of less then 100%, in my opinion, is the way to go.

James_Bond
Oct 22 2012 at 08:58
posts 556
incometrader posted:
Personally I think compounding is a great idea, but not at a rate of 100%. So if you had an account of say 10k and traded a lot size of 0.1, and built your account up to 20k, to have a compounding effect and reduce risk, rather then increase your lot sizes to 0.2 you could increase them to 0.15 (50% compound rate) So in short, compounding at a rate of less then 100%, in my opinion, is the way to go.


I agree. There's no point to compound 100% as you're compounding risk along with returns. I would average it - compound 50% of the profits only - that way you'll average out the best method without having to worry what method is better.
Important to note that compounding should be used only after your trading system proves its effectiveness.

DG (domgilberto1)
Oct 22 2012 at 09:17
posts 72
Is it just me or does anyone else find this thread (and some posts - no offence) a little strange?


(example - numbers are rounded to nearest pound to keep it simple...)

Balance: $10,000
Risk: 2% - $200.00 (at this point, assuming a loss is $200 and a win is $400 (1:2 R;R)

Loss: $200.00 - Account at close is $9,800 - 2% is now = $196
Loss: $196.00 - Account at close is $9604 - 2% is now = $192 (rounded)
Loss: $192.00 - Account at close is $9412 - 2% is now = $188 (rounded)
Win: $376.00 - Account at close is $9788 - 2% is now = $196 (rounded)
Win: $392.00 - Account at close is $10,180 - 2% is now = $204 (rounded)
Win: $408.00 - Account at close is $10,588 - 2% is now = $212 (rounded)
Win: $424.00 - Account at close is $11,012 - 2% is now = $220 (rounded)
Win: $440.00 - Account at close is $11,452 - 2% is now = $229 (rounded)
Loss: $229.0 - Account at close is $11223 - 2% is now = $224.0 (rounded)

So forth...


This is compounding^ Simple and COMPLETELY necessary. Your risk stays the same throughout... In this case it is ALWAYS 2% of your closing balance....


I am not looking at getting into a debate about this, if this is what the OP was referring to, then take my advice on it; if you do not trade this way, then you`re lost already....

"Taking responsibility is the cornerstone to a winning attitude"
Vader FX (incometrader)
Oct 22 2012 at 10:22
posts 157
domgilberto1 posted:
Is it just me or does anyone else find this thread (and some posts - no offence) a little strange?


(example - numbers are rounded to nearest pound to keep it simple...)

Balance: $10,000
Risk: 2% - $200.00 (at this point, assuming a loss is $200 and a win is $400 (1:2 R;R)

Loss: $200.00 - Account at close is $9,800 - 2% is now = $196
Loss: $196.00 - Account at close is $9604 - 2% is now = $192 (rounded)
Loss: $192.00 - Account at close is $9412 - 2% is now = $188 (rounded)
Win: $376.00 - Account at close is $9788 - 2% is now = $196 (rounded)
Win: $392.00 - Account at close is $10,180 - 2% is now = $204 (rounded)
Win: $408.00 - Account at close is $10,588 - 2% is now = $212 (rounded)
Win: $424.00 - Account at close is $11,012 - 2% is now = $220 (rounded)
Win: $440.00 - Account at close is $11,452 - 2% is now = $229 (rounded)
Loss: $229.0 - Account at close is $11223 - 2% is now = $224.0 (rounded)

So forth...


This is compounding^ Simple and COMPLETELY necessary. Your risk stays the same throughout... In this case it is ALWAYS 2% of your closing balance....


I am not looking at getting into a debate about this, if this is what the OP was referring to, then take my advice on it; if you do not trade this way, then you`re lost already....


That's right your risk stays the same if your compound rate stays the same. But, if you want to reduce your risk as you grow your account, you may want to compound at a rate of 50% for example. What you're saying is fine for something like a term deposit where there is no risk, but with FOREX (as risky as it can be) it's wise to reduce risk.

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