Compounding Profits

Compounding Profits

Compounding profits is the subject of this week's trading tip. I am going to show you how you can start with a relatively small amount of capital and grow your account into a sizable investment.

You don't have to start big

When starting to trade Forex you should have a reasonable amount to fund your trading account. This doesn't have to be a huge amount... between $3,000 and $10,000 is a good starting size.

You can also start with a micro account from some brokers which will let you start with as little as a few hundred bucks.

An account needs to be large enough to allow you to weather some drawdown, as well as offer the potential for good growth. The chart below starts with a $10,000 account and grows from there.

The power of compounding

This example shows how you can safely trade your smaller account and grow it into a major one, using steady growth and the power of compounding.

The calculation assumes the following criteria...

$10,000 starting amount
maximum 5% leverage (margin)
50 pips per week gain
all profits are left in the account

As your account grows, you are able to purchase more lots and stay within a 2% to 5% margin limit.

As you can see, even a $10,000 account can quickly grow with only modest gains. Of course there will be weeks when you might not make 50 pips, but there could be other weeks where you make much more.

There are two keys at work here that need to be re-stated:

Limit your margin
Compound your profits

If you can develop a trading system that will return 10 pips per day, or 50 pips per week, you can grow a $10,000 account into one with a value of almost $34,000 in a year.

Is it worth the effort? You know it is.

At the end of year two, this account is worth $119,850 and earns $2,900 each week. Don't give up.

Wishing you trading success,
David Stevenson.

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