I have a problem understand compounding. I hope someone can help me out.
Let’s say I have a $5,000 account. Then I make 50 dollars and add it to my account.
Then I make another 50 dollars to my account. I now have $5,100.
Now this is simple arithmetic, but where does the growing exponentially come in?
If I trading a mini account at 0.1 volume, how is my account growing?
Are my pips worth more? What’s going on?
Thanks
your account grows as you add to the amount of the trade… ie 2% is now 102 that you can risk on your S/L
Pepper, um not to be rude, but, you may want to not trade until you understand basic concepts like Compounding, Margin, Pip Value etc. Please see the Pip School on this site it will help, I’m just sayin.
The Ever Just Trying Helpful VIPER
Sorry but that was kind of rude.
What the heck is this form for if one can’t ask a newbie question?
Besides, I never stated that I was trading live. I wanted to know these things BEFORE I trade live.
I finished the school of pipsology, started a demo account and plan to take everything slowly and step by step. Is something wrong with that?
I would admit that I didn’t grasp everything in the pip school the first time around, but I often go back to re-learn things.
I also get information from other sources. I just wanted to get a different explanation of compounding.
This is only my first 3rd post to this form, but if this is the reception newbies get around here I won’t ask anymore questions.
I’ll stick to studying the wealth of information around this site.
Pip value = lot size x .0001
Since you’re trading .1 lot or $10,000, your current pip value is $1 (for a 50 pip win you’ll get $50). Assuming that you trade with 2:1 leverage and fixed mini lots , you’ll need to win about a minimum of one hundred 50 pip trades for your pip value to turn into $2 (50 pip win = $100).
Thanks for that davidlee7
Its all about risk…and the idea is to keep the risk you take the same, not take more risk to earn more money.
How do you do that??
By increasing your lot size as you progress. increasing lot size increases your per pip pay out.
When you increase your per pip pay out by using ur previous profits to keep the risk at the same % level, that is called compounding.
Thanks for your reply. I think I’m getting a better understanding.
I had a rough idea that compounding was what you just explained.
I just wasn’t sure.
Compounding in Action:
(for interest sake)
Using the starting balance for the month, apply a __% gain each and every month and you will multiply your account by __ in 12 months:
6%…x2
9.6%…x3
12.3%…x4
14.4%…x5
…
21.2%…x10!
I’m interested. Thanks!
[B]Hey PepperCupcake[/B]! 
Welcome to the forum and allow me a quick response that might assist you in your inquiry, concerning “Compounding Interest” and the effects it could have on your equity in trading…
First let’s set up our example parameters:
Ideal Trade Objective: Double the account every year.
Modular Goal: 6% month return
Risk Per Trade: 2%
Now with the parameters above… we can use a “fixed” risk ratio to equity that never increases above 2% per trade. We are aiming for a 6% return on equity per month. This surprisingly is quite easy… and for new traders and those struggling might be relieved to know it only requires approximately 20 pips per week. Yes you read that correctly… 20 (Twenty) pips gain for the entire week of trading. Interesting isn’t it?
Now let’s also note that this weekly pip gain of a little more than 20 pips while risking 2% per trade and using a equal stoploss of 20 pips… our risk to reward is essentially 1:1. Not the best, but certainly doable for this example.
At the start of trading your $5000 is ideally increased by first week of trading with 20 pips net gain. This would be accomplished by the following:
$5000 x .02 = $100 / 20 [pips] = $5 or 50,000 leverage
As your equity builds from $5000 that number is replaced by the new equity base. The pip objective per week remains static at 20 pips or so and the risk is never increased by % but as the equity increases it will in dollar terms but not in % to account total.
If you net a return of 6% per month again only using 20 pips or so a week net gain and risking no more than 2% of equity, over a year the account more than doubles in value. A $1000 account can see over $1,000,000.00 in about 10 years… how’s that grab you?
Now if you can grab 40-50 pips for a week net gain you can risk 1% per trade and have a more professional approach to trading and this will serve you quite well… assuming you have a consistant trading model that you can follow… naturally.
Hope this helps…
[B]GLGT [/B]:57:
Account: $5000
Risk per trade: 2%
Target 6% per month
Objective 20 pips per week net gain
Repeat…
Hey ICT,
since you’re here, and we’re on the subject, what would you say about the exact 20/20 strategy outlined above, but applied to a 20pips per day type of goal structure. Obviously not 20pips every day, but try for 20pips, give it 2 attempts max. and be done for the day in all other situations?
I attempted the above this week, using session highs/lows, along with the other basics of fibs/pivots/flows/etc. and found I did very well (+3.85%) this week. All with 1% risk and 20sl/20tp ratios.
I’m not sure how well you know my level of experience with the tools, but I do feel pretty comfortable with them. I was finding it difficult to properly scale out of my swings trades because I always needed to sleep and work at key times. This undermined my confidence in even taking the trades, knowing I couldn’t exit it properly. The scalps jive with my situation reallly nicely, and I would hope to get back to the swing trades when I have F/T availability.
any comments on this? 
I hope this is of interest to you peppercake, I don’t mean to be hijackin yo thread! :41:
Pepper,
if you want use compounding, forget about pips. Just think in percentage. If you have a 1% gain on every winner, your account grows 1 percent on that. The next trade will not only give you 1% profits on the base capital, but as well on the other winning trade. And so forth.
Put another way, letz say your account grows 100% per year, aka doubling your account each year, just do the math: 1k, 2k, 4k, 8k, 16k, … and so forth. That would be an exponentially grown account. After 10 years that would be 1k x 2^10.
Not to say trading in practice is like that you can safely double your account every year. Just for the better understanding.
most cannot believe the ROI or the numbers.
Wow thanks for the detailed explanation!
no problem…
Good Luck & Good Trading. :57:
Hello,
I’m new to this site, but it looks great, I’ll hang around a while.
Hi Pepper,
Damn, it wont let me add a link… oh well. Maybe when I’ve done the 5 posts.
Pepper, I can’t help thinking that you may be still confused by some of the answers to your question.
I reckon that, while the guys were quite right, the explanations certainly weren’t aimed at a newbie’s level!
So may I add my two penn’eth?
I WAS going to give you a link to a brilliant set of short videos made just for newbies… but never mind.
Try doing this:- Get hold of a pen, a notepad and write this heading:
"Starting with (say..) $100 bank"
Then 1 to 12 vertically:
1,
2,
3,
etc etc
Now, these are ‘end of month’ numbers, ok?
Ok, so now you trade for a month and let’s say you make a 6% profit.
So, at the end of month one, (Jan?) your bank has grown by that 6% to $106.
THIS is your new starting bank for month two, trade another month, add 6% to your $106 and write it down at 2.
It’s $112.36, right?
Similarly, trade month three, profit the same 6% and you now have $119.10, after trading for 3 months.
Now, I’ve got a bit of time, so I’ll do the next nine months for you… but DO do this exercise YOURSELF afterwards, it’s a great way of it really getting into your head.
1, $106
2, $112.36
3, $119.10
4, $126.24
5, $133.82
6, $141.65
7, $150.36
8, $159.38
9, $168.94
10, $179.08
11, $189.82
12, $201.21
You’ve doubled your starting money in just one year!
Right, want to REALLY feel amazed? take 10 minutes and do the same again for another four years… (your 5 year plan?) It comes to… well, you do it… haha. I’ve done it… and it’s enough to make you giggle all day long :).
THIS is what compounding your profits is all about.
Save all the clever maths for later, when you “have things at your fingertips”.
See? There’s a lot to be said for K.I.S.S.
Come back and let me know how you get on.
Oh, and don’t forget, 6% isn’t THAT hard to achieve, and here’s the BEST part that many many traders don’t see…
You’ve seen that your bank can build steadily, even at a very achievable 6%… this means that YOUR STAKE PER PIP can grow steadily also… can you see where this is going…???
It means… that on a shorter and shorter timescale, you can steadily reduce the NUMBER OF PIPS that you need to chase!!
THIS MEANS that you do not need to hang on with fingers crossed so much that the pips go far enough to make something…
If you trade at, say, a dollar a pip, yes it will take a while to make a great wad of cash.
This is daft thinking mate, and is why newbies (and not so new… crash).
listen…
Actually DO that compounding exercise… write it all out.
See that AS WELL as your profits going up… you can keep to your rule of staking, say, 2% per pip… but that 2% is now on an increasing bank isn’t it… in time, you could, and will, be staking LOTS more per pip… but with a MUCH more conservative safety strategy in place.
Get it?
2% of month 12’s bank is quite a bit more than your starting 2% of $100 isn’t it. Sounds too simple and still a low figure to bother about doesn’t it. Wait untill you see what 2% of year five’s bank is.
At 200, 300, 400, dollars a pip, you can take earlier, SAFER profits and get out before things go pear shaped!! Sure, you might think “ohhh damn” when you see the chart going further your way when you’ve closed… but you have pulled out a large profit to bank, be happy about it! It’s nice only needing to chase five pips, or ten pips… instead of ‘hoping’ for that 100 pip run.
Get your pen out and start writing. THEN try the same thing at a still achievable, say… 13%, 17%.
You’ll wet yourself.
Just be firmly, FIRMLY… disciplined with yourself. KNOW what you are getting into, on every position you take.
Never, EVER think "oh I’ll just have a go and see what happens"
Because something WILL happen… but you wont like it.
Enjoy,
Slow.
Thanks Slow,
This is awesome!
You broke it down to me like I’m a six year old.
Do you think there’s a way you can direct me to the videos you mentioned without leaving a link?(basic name or something?)
If not, no worries you covered a lot. This was a big help.
to make things more interesting… what if instead of day or even month… we make it trade. this is something more applicable i say.
ok we will need position calculator for this, can be found easily in the net. here’s a pic
as we have agreed the pips target and percentage stop loss always stays the same. the stop loss pips actually can be differ according to the setup. however for the compounding matter, it is the lot size that needs to be adjusted. this is when the calculator comes in handy. after a trade whether it’s a win or loss, adjust your equity in the calculator. the calculator will give out what lot size suitable for your new position with consideration of your equity and trading setup.
this way your percentage risk will stay the same regardless the amount of equity.
Hi.
I can’t fault any of those posts, they’re quite right and is how most of the worlds traders trade.
I.E… get used to a certain level of risk that stops you having palpitations and visiting the loo every ten minutes
Getting to an acceptable level may take some time though I think, in all honesty.
“should I put a bit more on, to make it worth it?”
“should I reduce it a bit and play safe?”
“should I add a bit from the holiday fund?”
Etc etc… we’ve all done it.
So, as I mentioned earlier, why not up your pip stake as your bank grows?
Not to a ridiculous level, but certainly to a much higher level (in time…) that you may have thought impossible, months
(or even years) before you ‘got’ the idea of compounding.
And again…
If and WHEN you can afford to stake more, then surely it makes sense to REDUCE your risk… that way you will both FEEL a lot less stressed… and you will actually make more money too.
>>> more risk = more risk of stopping out
>>> less risk = less risk of BEING stopped out
I see it like this, most folk chase a notional ‘target’ that they will close at and take the profit.
Now just for a moment forget about a pip count, a percentage or anything else… it’s money you are chasing isn’t it.
Why not set a money target?
So, let’s say you are in the nice position of being able to stake at your new, compounded level, of staking.
(Does it matter how long it takes? No. Play the long game).
Now you tell me, isn’t it going to be easier to reach your (money) target a lot easier if you are chasing fewer pips?
'Course it is!
Therefore, you are now able to actually REDUCE your risk and not trade so aggressively, yet also make it more like that your trade will come good for you.
I often think that getting buried in the technicalities can get us bogged down… there are plenty of traders who are brilliant at knowingt all the bells and whisles of a platform and charts etc, but still don’t make any money… or do, but lose it just as easily.
Yes, losing a trade when you’ve staked a lot more on it, pip wise, stings a bit… but that sting wont happen as often when you reduce the likelyhood of it!! See?
Play as safe as you can, make your target money… and turn off the computer and go fishing, take the family out, or do the caveman thing with your wife.
That way, time at the computer can actually become fun!
Slow.