How does Forex Compounding work – find all the relevant information
In the last few years, Forex trading has been attracting more and more attention on the Internet, thanks to the great opportunities for making serious profits. In this regard, many individuals around the world have begun to research everything that has to do with Forex to improve their trading skills.
One of the most important things in Forex that every trader must understand is Forex compounding. Thanks to him, most traders managed to double, even triple, their profits.
For this reason, you must truly understand what compounding is in Forex. Let’s start with a simple definition.
Forex compounding definition – understand what’s all about
Compounding a Forex account refers to a money management technique that can take the money a trader has made in profit to invest it in more weight. Eventually, a trader would build up his trading capital in a highly profitable, exponential way.
In other words, it is the method of reinvesting previous profits back into the investment to increase traders’ profits even further. So if a trader is not reinvesting his earnings, he can expect his assets to grow to be nothing more than linear. On the other hand, in case a trader is about to reinvest capital, growth will be 100% exponential. That’s what Forex compounding is all about.
Forex compounding calculator – briefly explained.
One handy tool helps traders calculate their profit earned over a predefined number of periods. It’s called a Forex compounding calculator and is widely used worldwide.
This calculator works with three simple things:
- The input of the starting balance
- The number of periods trader is compounding the starting balance
- The percentage gain per period.
The result will be shown in a detailed table. Traders will be able to see the investment progress per each period in that table.
How can traders calculate compounded Interest?
You must be aware of several things to calculate compounded Interest, which represents the Interest on a deposit or a loan based on the initial principal and accumulated Interest.
You can calculate it using the compounding period profit, which can be daily, monthly or annual, and contribute to the number of periods of your Interest. Let’s take a look at the following example:
- An annual interest rate of 10%
- Compounded of 2 years
- The initial investment of $100
The first year will result in a $10 profit out of $100. The second-year will result in an $11 gain out of $110. So, the total profit will be $121, which, in comparison with a non-compounding investment of only $120 and a fixed $10 profit per year, you can realize why compounding is considered one of the best ways to increase profits.
Why is Compounding Interest of great importance?
When a trader’s investment is profitable, please don’t doubt that compounding Interest can have a substantial long-term impact. Not for nothing did the famous scientist Albert Einstein describe compounding as “the most powerful force in the whole universe”.
The reason for that is that the compounding interest can double and even triple your return, regardless of your daily or monthly contribution to your investment.
