Hello guys here I am sharing a very interesting topic for which we heard and discuss many times and that is Compounding my dear friends so I am trying to share few things about it below-:
WHAT IS COMPOUNDING-: Compounding is the concept of continually reinvesting the earnings from an investment to generate more earnings, which are also reinvested to earn more, thereby growing the value of the investment over time. To put it differently, compounding is the process of generating earnings from both the initial capital and the earlier earnings on the capital. The term compound gains refers to the sum of the accumulated earnings over the specified period. That is, the gains earned on the principal amount is reinvested, and it earns an additional gains — the accumulation of both the interest on the principal and the gains on the earlier gains is called compounding gains.
So, compounding is basically a process of earning compound returns on an investment. Compounding is a simple concept but very powerful because it has a multiplier effect on the initial capital — the ability of the investment to generate earnings from not only the initial principal invested but also the subsequent returns earned over the coming period. No wonder Albert Einstein referred to it as the 8th wonder of the world: “The magic of compounding lies in the fact that it can help investors multiply their returns over the long-term”.
WHAT COMPOUNDING REQUIRES AND HOW IT WORKS-: Compounding requires three things:
1- The original investment remains invested
2- The reinvestment of earnings
3- Time
The more time you give your investments, the more your earnings would accumulate. So, to take full advantage of the power of compounding, you have to start investing early so that your investment will have enough time to accumulate and compound earnings. However, what you earn depends on the rate of returns, as that is what accelerates the income potential of your original investment.
To understand how compounding works, let’s take a look at this example. Assuming you invest $100 at a 10% return, you’ll have $110 at year’s end. If you don’t reinvest the 10 you earned, your return at the end of year 2 will still be just $10 (10% of the initial 100), and you will have only $120. But if you reinvest that $10 you earn the first year, you will also make a 10% return on it in year 2, so your total return on year 2 will be $11 instead of just another $10, and you will have $121 instead of $120 as you would if you weren’t compounding your earnings. See the two tables below for non-compounding investment and compounding one for a 10-year duration.
HOW TO GROW TRADING ACCOUNT BY COUMPOUNDING-: The same way the power of compounding is used to grow investments, you can use it to grow your trading account because your trading capital is an investment on its own. But since trading is an active process and with no consistent rate of returns, you need to know how to actively make compounding work for you.
Before we go into details, let’s examine some important trading concepts you should know, which are necessary for implementing a growth plan. These are the three key ones below
Account risk percent: This refers to the percentage of your trading account you risk per trade. This can be 1%, 2%, 5%, or even 10% if you are an aggressive trader. Most experts advise traders to risk only 1% or 2% of their account capital in each trade to reduce the possibility of blowing their accounts in no time. Once you have chosen the right percentage to risk in each trade, you may want to keep it constant.
Position size: This is the quantity of the instrument you carry in each trade. For stocks, it is the number of shares you buy, while for futures, it is the number of contracts you want to trade. In forex trading, it is called lot size. Whichever the market, your position size is a function of how much you want to risk in that trade. To get your position size, you need to convert your account risk percent to the dollar amount. For example, if you have a $10,000 account and decides to risk only 1% of it in each trade, it would translate to risking only $100 in each trade. With this, you can calculate your position size if you have decided where to place your stop-loss order. Here’s the formula in the case of stock trading: Position size = account risk (in dollars)/ (stop lose size x the share price). Assuming the account risk is $100, the share price is $5 per share, and the stop loss is 10%, the position size (number shares to buy) is 200 shares (100/). Thus, as your account balance grows, your position size increases without increasing your account risk percent.
Reward/risk: This is the ratio of what you stand to make for any risk you take. It depends on your trading strategy. You can have a trading strategy that allows you to have your profit target at 2 times your stop loss size. For instance, if your stop loss is a 10% drop in share price, your profit target can be a 20% gain in the share price. So, if your strategy has a fixed stop loss and profit target, you can only increase your earning by increasing your position size, which you can do only when your account balance increases so that you don’t increase your account risk percent.
So that is it friends mates and respected seniors I have to bind up this article already it has been lengthy so going to share one last point and that is the difference between compounded or non compounded returns-;
NON COMPOUNDED INVESTEMENT
COUMPOUNDED INVESTMENT
WHAT IS COMPOUNDING-: Compounding is the concept of continually reinvesting the earnings from an investment to generate more earnings, which are also reinvested to earn more, thereby growing the value of the investment over time. To put it differently, compounding is the process of generating earnings from both the initial capital and the earlier earnings on the capital. The term compound gains refers to the sum of the accumulated earnings over the specified period. That is, the gains earned on the principal amount is reinvested, and it earns an additional gains — the accumulation of both the interest on the principal and the gains on the earlier gains is called compounding gains.
So, compounding is basically a process of earning compound returns on an investment. Compounding is a simple concept but very powerful because it has a multiplier effect on the initial capital — the ability of the investment to generate earnings from not only the initial principal invested but also the subsequent returns earned over the coming period. No wonder Albert Einstein referred to it as the 8th wonder of the world: “The magic of compounding lies in the fact that it can help investors multiply their returns over the long-term”.
WHAT COMPOUNDING REQUIRES AND HOW IT WORKS-: Compounding requires three things:
1- The original investment remains invested
2- The reinvestment of earnings
3- Time
The more time you give your investments, the more your earnings would accumulate. So, to take full advantage of the power of compounding, you have to start investing early so that your investment will have enough time to accumulate and compound earnings. However, what you earn depends on the rate of returns, as that is what accelerates the income potential of your original investment.
To understand how compounding works, let’s take a look at this example. Assuming you invest $100 at a 10% return, you’ll have $110 at year’s end. If you don’t reinvest the 10 you earned, your return at the end of year 2 will still be just $10 (10% of the initial 100), and you will have only $120. But if you reinvest that $10 you earn the first year, you will also make a 10% return on it in year 2, so your total return on year 2 will be $11 instead of just another $10, and you will have $121 instead of $120 as you would if you weren’t compounding your earnings. See the two tables below for non-compounding investment and compounding one for a 10-year duration.
HOW TO GROW TRADING ACCOUNT BY COUMPOUNDING-: The same way the power of compounding is used to grow investments, you can use it to grow your trading account because your trading capital is an investment on its own. But since trading is an active process and with no consistent rate of returns, you need to know how to actively make compounding work for you.
Before we go into details, let’s examine some important trading concepts you should know, which are necessary for implementing a growth plan. These are the three key ones below
Account risk percent: This refers to the percentage of your trading account you risk per trade. This can be 1%, 2%, 5%, or even 10% if you are an aggressive trader. Most experts advise traders to risk only 1% or 2% of their account capital in each trade to reduce the possibility of blowing their accounts in no time. Once you have chosen the right percentage to risk in each trade, you may want to keep it constant.
Position size: This is the quantity of the instrument you carry in each trade. For stocks, it is the number of shares you buy, while for futures, it is the number of contracts you want to trade. In forex trading, it is called lot size. Whichever the market, your position size is a function of how much you want to risk in that trade. To get your position size, you need to convert your account risk percent to the dollar amount. For example, if you have a $10,000 account and decides to risk only 1% of it in each trade, it would translate to risking only $100 in each trade. With this, you can calculate your position size if you have decided where to place your stop-loss order. Here’s the formula in the case of stock trading: Position size = account risk (in dollars)/ (stop lose size x the share price). Assuming the account risk is $100, the share price is $5 per share, and the stop loss is 10%, the position size (number shares to buy) is 200 shares (100/). Thus, as your account balance grows, your position size increases without increasing your account risk percent.
Reward/risk: This is the ratio of what you stand to make for any risk you take. It depends on your trading strategy. You can have a trading strategy that allows you to have your profit target at 2 times your stop loss size. For instance, if your stop loss is a 10% drop in share price, your profit target can be a 20% gain in the share price. So, if your strategy has a fixed stop loss and profit target, you can only increase your earning by increasing your position size, which you can do only when your account balance increases so that you don’t increase your account risk percent.
So that is it friends mates and respected seniors I have to bind up this article already it has been lengthy so going to share one last point and that is the difference between compounded or non compounded returns-;
NON COMPOUNDED INVESTEMENT
COUMPOUNDED INVESTMENT