Compounding Your Trading Capital!

I’ve often said to my trainees that Forex Trading is one of the very few ways by which one can start with a relatively small capital and achieve financial freedom by maximizing the power of compounding. We’ve all heard of people who mutilply their accounts manifold, and many wonder how these people achieve their million-dollar net worths through the business of currency trading.

In the light of the current financial crisis, many people have lost faith in all forms of investments. So, when you tell them you can generate a consistent monthly return of 10% or more, they think it’s unrealistic.

To me, trading is almost the only way to get this kind of returns regardless of the economic climate. A “10%-per-month” goal does sound hard for some people, but if you break this goal down to trade-by-trade goals, you start to see how realistic it is.

Contrary to popular beliefs, you don’t need to do too many trades. Personally, I find that aiming for about 10 trades a month gives me a comfortable way trading the Forex market. I don’t need to be stressed about doing too many trades. It also means you are more selective about doing trades, which in turn means that your success rate should be higher. A 70% average success rate can make you very rich over time!

Suppose you do 10 trades a month, and 7 of them are winning trades, and the other 3 are losing ones. If each winning trade gives you a return of 3% of your account size, and each losing trade results in a loss of 3% of your account size, the net result of your 10 trades in the 1-month period is a return of about 12% of your account! Remember, this is assuming a 1:1 risk reward ratio in every trade. In some cases, your profitable trades will lead to a return of more than 3%.

So, you see, it is discipline that allows this process to be repeated over and over again - trade after trade, week after week, month after month, and even year after year. That’s why some traders can multiply their capital manifold with sheer discipline. A monthly return of 10%, when compounded, will triple your capital in 1 year, and mulitply your capital by 10 times in 2 years! Such goals seem far-fetched at first sight, but when you break them down to monthly goals, and even trade-by-trade goals, you start to see how discipline and perseverance will make the small goals snowball into big goals!