Economics Investing

The Compound Interest Must Work for Traders

Unfortunately, a lot of people, who have been trading currencies, stocks, commodities or other financial instruments, didn’t use such good instrument, as compound interest. Otherwise, they could earn much more. But what is it? The interest earned on accumulated capital and previously earned interest together will create the compound interest.

Compound interest was described by Einstein as the 8th wonder of the world. It is what has enabled some people to turn small amounts of money into thousands and even millions of dollars. Believe it or not, compound interest has also made banks and credit card companies rich, even as it makes those on the wrong side of the coin broke and in debt.

Compound interest is thereby a double edged sword, but you can put it to work for your money today. There are many retail traders who are complaining of losing money trading. A careful review of their trading activity will show that they do not understand the mightiness of compound interest, that’s why they use maximum risk in a bid to achieve maximum returns. You can use minimum risk and attain maximum returns with compound interest. The main difference between the start and end points is time, consistency and discipline.

So, as a small trader, how can you use a compound interest? Let’s imagine, you have just $1,000 as trading capital. Look at this Excel sheet.

The formula has been calculated to show what a trader that starts a trading career with $1,000 can achieve in three years of trading with compound interest. This Excel sheet assumes a 20% compound interest increase every month.

$1,000 is money that every one of us can get if we cut back on a few bottles of beer over a few months, pick up a side gig or moonlight a little. Once you have your $1,000, open a trading account. It does not really matter if you open a demo/real account with any brokerage company or a stock trading account. You can even move the money around. Put it in stocks for a few months, then in forex or other CFD accounts, and keep trading it. The focus is to try to make 20% a month using minimum risk. How can this be achieved in practical terms?

  • Let’s take the first month. The aim is to make $200 on a $1,000 account size. Trading 20 days per month, all the trader has to make is $10 a day in that month. It is possible to make such sum using 0.01 Lot on a $1,000 account. Many brokers offer micro Lot trading. This is a demonstration of how to use very low risk to attain targets. $10 a day may not seem like much, but as you can see from the Excel sheet, compound interest can push up the account to a point where the trader can be making $500 a day while still using a similar risk profile as the $10 trades.

  • As the account grows, the trader can increase the lot size at the auction in accordance with the increase in the account without increasing the level of risk. For instance, if the trader uses 0.01 Lot for trades when the account was $1,000, the Lot size can be doubled by the 4th month when the starting account size is $2,073. Forex Lot size calculators can be of great help here.

  • The trader can adjust the figures on the left side of the Excel sheet. Account capital used in starting the journey can be increased or reduced, and the % returns target adjusted from 20%. The trader therefore should get someone proficient in Excel to compile the formula. For instance, D5 = SUM (A5*B5) +A5 and E5 = SUM (D5-A5). The formula for other cells can be compiled from these base formulae.

Conclusion

Many traders may see this and decide that it looks good and is worth the trial. But then they never get around to the practical side of it. You need to start now to be able to set yourself on this path. Is three years a long time? It is not. You can start now and check to see where you will be when the next FIFA World Cup in Russia kicks off in just under three years.

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