Monday, June 8, 2009
Forex Cash Compounding
Most people who are new to Forex think that earning cash using Forex is almost like any other type of work - the more work you put into it, the more money you will get in return. And some people think that Forex is like a gamble - the more luck you have, the more trades you will win. And so, they base their trading on effort and luck, putting in more effort and crossing their fingers to try and earn as much cash as they possibly can.
While the above scenario can be workable, it is of high risk and can backfire most of the time. The Forex market, at small timeframes, is almost unpredictable to almost everyone. This is why some traders use compounding instead. How does compounding work? Well, let’s look at Forex trading as an investment instead. You invest 10000 and expect to get 1% in return, which is 100. That is not much, but it is safe. Because by doing this consistently, your cash will increase steadily. Maybe a lot slower than trying to win trades everyday, but with compounding, you do not stress yourself out watching the screens every minute every second, and you do not get to feel the high level of risk.
Have a look at 10% monthly compounding:
Month Cash
0 10000
1 11000
2 12100
3 13310
4 14641
5 16105
6 17716
7 19487
8 21436
9 23579
10 28531
As you can see, after 10 months, your initial 10000 capital would be more than doubled!
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Sunday, October 18, 2009 - 04:45:55
The last part is actually referring to the Rule of 72, where the amount of time required to double your capital is equals to 72/i, where i is the interest rate (in %).
So with a 10% every month, the amount of time required to double your capital is 72/10 = 7.2 months. You would have doubled your capital after 8 months!!
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