Forex Compound Calculator

How To Use the Forex Compound Calculator?

Now that you know how forex compounding works, let's look at how our forex compound calculator will show how compounding can grow your account over time.

Using our initial $10,000 let's look at the calculator in action. Let's say that you risk no more than 1% of your account and you aim to generate a return of 0.5% per period over 8 periods.

If we key these numbers into the calculator and click calculate, you'll see that your ending balance will be just over $10,400 and you would've earned a total return of 4.1%.

How Does Forex Compounding Work?

You've probably heard what some of the greatest thinkers of our time thought about compounding. For example, the great Albert Einstein called compound interest the eighth wonder of the world. Likewise, billionaire Warren Buffet attributes a significant portion of his wealth to compound interest.

We don't know how true this is, but we can guarantee you that it works. In simple terms, it's one of the best ways to earn the most returns on your investment while lowering your risk. So, when trading forex, it's good to learn and understand how compounding works and how it can increase your returns.

So, how does forex compounding work? At its core, compounding relies on reinvesting any profits you make through trading. By doing this, you can achieve exponential growth on your forex trading account.

To better illustrate the concepts behind compounding, let's look at a practical example from an investment perspective. Let's say, for instance, you deposit $10,000 into an investment account. Now, let's assume you're able to earn returns of 15% per year on your account.

Considering the above, you'll make $1,500 per year, or just over $120 per month, with your trading. Now, this doesn't sound like much, does it?

Another problem is that, because you're taking the profit, your investment won't grow. This means your monthly or yearly profit stays the same irrespective of how long you invest. If you do, however, choose to save these profits, you’ll achieve linear growth on your investment.

Now, let's switch to a compounding strategy. Here, we'll use the same $10,000 deposit and a rate of return of 15% per year. So, for the first year, you'll make the same $1,500 as before. But that's where the similarity ends.

Instead of taking the $1,500 profit, you'll reinvest it. This means your account balance for the next year will be $11,500. As a result, you'll earn a return in the second year of $1,725. You'll reinvest again and in the third year your account balance will be $13,225 and you'll earn a return of just over $1,980.

This cycle will continue, and in our example, where you'll earn a return of 15% per year, you'll double your initial $10,000 in 5 years. Compared to our earlier example, you'll note that here you'll achieve exponential growth as opposed to linear growth.

When looking at forex trading specifically, compounding works in the same way. The difference is that you'll typically add the profit you make on a trade to your account balance and use the higher amount to calculate your position size.

For example, let's say your account balance is $10,000 like before and you use a fixed position size of 1% per trade. So, you'll risk $100 on each trade. If you make a profit on a trade, you'll add that to your account balance and recalculate your position size. In this way, your account will grow much faster. Keep in mind, though, that you’ll need to achieve more than a 51% success rate on your trades for it to work.