Forex has recently become one of the most common terms in the online community and one of the most popular deals on the internet. Almost no one has not tried or at least heard of the term “Forex Trading” and “Foreign Exchange Market”.
However, are you familiar with the term “compounding” in Forex? Have you ever met him before? Whether you are just starting your long-term career in the foreign exchange industry or have some previous experience, you would surely like to learn what Forex Compounding is and why it is essential in this business.
So let’s start with the definition and explanation of this interesting term.
What is Forex compounding exactly?
Forex compounding describes the action of reinvesting the profits back into the investment to multiply profits even more. In other words, it is “getting interested on interest” because if you’re not reinvesting profits, you can be assured that your investment growth will be linear.
On the other hand, when you are about compounding profits, you can expect the growth to become exponential since you will be profiting on the investment and reinvested capital. To sum it up, the most basic definition of compounding is that it’s a Forex investment strategy addressing promptly increasing the deposit and multiplying the increase in the account balance.
Forex compounding calculator – explained.
The famous Forex compounding calculator is a handy tool specially developed to stimulate how the profitable trades with a set gain percentage and compounding the initial equity can make a trading account grow exponentially over time.
The calculator works by simulation of the compounding and the reinventing of the same percentage of the account’s total equity. Thanks to this calculator, traders can input the settings to calculate the compound results of a set of winning trades more accurately over a given period.
What does using this calculator show?
The usage of the Forex compounding calculator can demonstrate to traders how compelling gains compounding can be. For example, even a limited gain percentage of 2% per single trade can turn the initial capital of the account into a substantial amount of money over time.
How can you calculate the compounding interest?
To calculate the compounding interest, it’s essential to understand that you’re doing so by using the compounding period profit. It can be daily, monthly, or annual and contribute to the number of periods you are interested in.
Here is one example of it:
An annual interest rate of 10% compounded for two years with a $100 initial investment. It will result in $10 profit for the first year and $11 profit for the second year. The total profit will be $121. Compared with a non-compounding investment, it would probably result in only $120 since you can only get a fixed $10 profit per year.
Why is compounding interest so essential?
Compounding the profits is one of the best things one trader can do since compounding interest will significantly impact it long-term. Albert Einstein once stated that compounding is the “eighth wonder of the world”. He was right because the interest you earn on your investment can triple your return!