What is a Forex compounding?

The Forex compounding strategy is a simple yet effective way to grow your Forex portfolio, no matter what strategy you choose to use while trading. As a Forex trader, the main objective is to make a consistent and stable structure that brings good returns on investments. Compounding is a growth process. If you are familiar with the "snowball effect", you already know how something can build on its own. The compound interest is the interest earned on money that was previously earned as interest. This cycle leads to an increase in interest and account balances at an increasing rate, sometimes called exponential growth.

To understand compound interest, let`s start with simple interest: you place money and the bank pays you interest on your deposit.

For example, if you earn 5% per annum, a $1000 deposit will bring you $50 in a year. What will happen next year? Now we got to the compounding. You will earn interest on your initial deposit, and you will earn interest on the interest you have just earned.

So, the interest that you will earn in the second year will be more than the year before, because your account balance is $1050, not $1000. This way, even if you have not made any deposits, your earnings will accelerate.

• Year One: With an initial deposit of $1000 you will earn 5%, or $50, bringing your balance to $1050.
• Year Two: Your $1050 earns 5%, or $52.5; your balance is now $1102.5.
• Year Three: Your $1102.5 balance earns 5%, or $55.13; your balance is now $1157.63.

Now applying that to Forex, the compounding is the method that is best suited to trading strategies that can take positive pips over time, regardless of the size of the position you place on the trade. For example, if all your trades were 1 standard lot over time, you would end up being profitable over the trading period. If you need to change your position to compensate for other losses, it means that you may be financially profitable, but you will not be profitable when it comes to measuring your total profit in pips.