Compounding Forex Trades

Albert Einstein is alleged (by some) to have said about compound interest:

“It is the greatest mathematical discovery of all time”

Let’s apply the principle of compound interest to your forex training.  To do so, we need to first define “pip”… a highly touted phrase in the forex trading world.

A pip is simply a small unit of forex measurement and in almost all Forex training courses people begin with daily targets of anywhere from 20 to 50 pips a day.  This is excessive and typically leads to greed, over exposure and needless risk.

My preference is to set a daily goal of 4 pips… conservative, safe and still quite profitable.   For example,

Let’s say that 4 pips a day gives you around a 1% return on investment (ROI)… that’s 1% return on investment per day.

With a 20 trading-day month, you get 20% per month. If there are 240 trading years each year, you will receive a massive 240% return… right?

Actually, it’s a helluva lot more than that.  Let’s take a look at how this strategy can truly explode your ROI.

On Day One, one percent is 1% on your ORIGINAL investment.  On Day Two, another 1% is calculating on the compounded amount from Day One.

On each day of the 240 days, you are making a one percent return on the
accumulating total; hence, compounded return versus simple return.

So here are the actual figures for monthly ROI on your original investment based on a NET 4 pips per day, 5 days per week – if you took nothing out.

Month 1 . . . . . 19.92%
Month 2 . . . . . 45.44%
Month 3 . . . . . 76.64%
Month 4 . . . . . 114.72%
Month 5 . . . . . 161.20%
Month 6 . . . . . 217.76%
Month 7 . . . . . 286.8%
Month 8 . . . . . 371.04%
Month 9 . . . . . 473.84%
Month 10 . . . . 599.28%
Month 11 . . . . 752.40%
Month 12 . . . . 939.12%

Moral of the story… don’t be greedy.  Just set up your daily activity to get 4 pips each trading day.  Conservative and doable!

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