Are you familiar with Forex Compounding? Have you ever heard about it and why it is imperative to deal with Forex trading successfully? Would you like to learn all there is to know about it to increase your knowledge and profits on a daily basis?
Whether you’re an experienced Forex trader who can boast an enviable forex trading career, or you’re just entering this industry, you need to know all the essentials of Forex to be successful in this online business. Every trader is keen to find new ways in order to increase their profits.
This article will focus on Forex compounding, its definition, explanation, and importance in this business. Let’s start with explaining what the term “compounding” means in Forex in the first place.
What is compounding in Forex – get the basics
Compounding in Forex is about the action of reinvesting profits back into the investment for the sake of increasing profits even further. In short, it means getting “interest on interest”. Why is this so important to understand?
As a serious trader, you would like to see your investments grow to become exponential and not linear. The only way to become a successful and wealthy Forex trader is to compound profits since you will most likely profit on the initial investment and the reinvested capital.
What does a Forex compounding calculator calculate?
A Forex compounding calculator is known as one of the essential tools in the Forex industry. It simulates how compounding the initial equity and the profitable trades, alongside a set gain percentage, can make a trading account grow over time.
It’s done by simulating the reinvesting of the same gain percentage of the total equity of the account and the compounding. With this calculator, traders are able to demonstrate how compounding gains can be robust.
The best example is that even an average gain percentage of, for example, 2% per single trade is likely to turn an initial capital of the account into a substantial amount of money over some time.
How to use the Forex calculator?
In order to use the Forex compounding calculator accurately, here is the following example that will help you do so.
- Starting balance: It represents the initial account equity of the trader. For example, let’s say our starting balance is 1,000 units of the account base currency.
- A number of periods: We can simulate a winning strike of x consecutive winning trades in the period’s fields. Suppose we’ll use a series of 6 consecutive winning trades.
- Gain % per period: The calculator’s most crucial field since it’s there to simulate the gain percentage per any compounding period. It’s able to be used by the trader who does five daily trades with a %0.05 target return per trade. It’s also usable for a trader making 12 trades per year and targeting a 5% return per trade. We’ll use again the percentage per period of 2%. After that, we’ll hit the “Calculate” button.
- The results are “The Ending Balance” after compounding the “Total Gain” percentage and gains of 6 consecutive winnings.