The theory is sound and you’ll find thousands of articles telling you how you will get rich using compound interest in your forex or futures trading account. Many of these articles will quote Einstein and other respected genius theorists to validate their claims. Some will claim compound interest is the “Holy Grail” of trading (spoiler here: it’s not).
So why are we going against the grain here and saying out loud and proud that Compound Interest Trading Calculators do not work? In truth, not only are these articles wrong, they are dangerous and they encourage traders to lose more and more money.
Fact: There has never been a broker documented record of any trader ever turning a small account, for example $5,000 into $500,000, anywhere in the world. Ever. (If you’d like to argue this fact please feel free to leave a constructive comment below.)
Frankly, so-called ‘Trading Educators’ who write and encourage traders that compound interest is their route to becoming millionaires are fake educators and are lying to you for their own benefit.
It is however possible for good traders to start small and end up trading significantly large accounts, just read on and I’ll explain.
Why trading compound interest calculators don’t work
In one word: Life.
No matter how many times you try to compound your winnings to eventually double your money and double again and double again, you’ll end up doubling down not doubling up.
The reality of life hits every trader hard, it seems so simple: just take keep taking trades at the same fixed percentage of your account and each time you take a winning trade it “compounds” and increases the account value so that your next trade is just that little bit bigger, and the one after that and the one after that. Simple… until life slaps you smack right in the middle of your face.
Inverse Compounding
The first thing to understand is that a losing trade always loses more than the next winning trade, for example on a $5,000 account a 2% risk/reward loss trade is $100 lost. The next trade, if a winner, is 2% of $4,900 is $98. Add a few losing trades together and quite quickly the account reduces and you’ll need to take a good deal more winning trades to get back to where you were. Compound Interest Trading calculators don’t show you the loss trades for a reason. Traders consequently find it very hard – if not impossible to stick to a compounding trade plan.
Traders are real People
Traders are not theoretical algorithms. They are real people with real lives to lead. Algorithms don’t have rent to pay. Algorithms don’t need to go food shopping. Algorithms don’t have student debt to pay. Algorithms are NOT human, you are. Let’s keep theoretical forex compound interest plans for forex algos – we’ll look in more depth analysing forex algos in another article in the near future.
Lets face it, most traders have to withdraw profits to pay for their lives, not just for the luxuries in life but often for the basics. The compound interest plan goes down the pan, when you need money to eat.
Let me reiterate the fact: There has never been a broker documented record of any trader ever turning a small account, for example $5,000 into $500,000, anywhere in the world.
I’m not going to say sorry for popping that bubble. I’m not going to say sorry if I’ve destroyed your dream. You are welcome to carry on dreaming, if you do so you will never ever become a successful trader – no matter how much you think you can “manifest” your dream. Please feel free to Google “manifest trading success.” Beware you won’t find a single real successful trader here. Alternatively..
4 Steps to grow a Forex and Futures trading account into a big one
You will need some money but you can do it with an achievable and realistic sum. You will need to treat trading like a proper job and you will need to invest in your own learning.
Step 1: Work out how much it will cost you to live for the next 6 to 12 months. Include your rent or mortgage, your food and all the costs you will be likely to face.
Step 2: If you can’t cover this cost with savings or other income you will need to find yourself a part-time position that provides enough for your basics and leaves time for trading.
Step 3: Allocate a reasonable portion of each day for trading and a portion for trading education, this does not need to be the whole day and you will need to leave space in your day for rest, leisure and fitness.
Step 4: Trade a small account without putting yourself under the pressure to grow the account. Your aim is to develop your trading expertise and document your trading success.
Your Turn
Please comment on this post, note anything you think this post is missing and we’ll update it. Here are some questions to help you:
How far did compounding trades get you?
Do you have a tip to help grow a trading account?
Comments
15 responses to “Forex Trading Compound Interest Calculators – don’t work, do this instead.”