The effect of compounding

[Edina]

Hi there,

I was wondering if anyone knew how to calculate the effect of compounding on a trading system's results.

I have been working on a system for a number of years, the returns are unspectacular but very consistent. On average it generates 8 trades a day with a success rate of just under 65% and an average is just under 0.5% per trade (after costs and commissions).

So for simplicity lets say 2000 trades a year with 0.5% return on average. Each trade being 1.25% of my capital, compounding.

I know about the powerful effect of compounding, but not sure how to calculate the effect of it on my annual returns if the results were as detailed above?

Can anyone smart help please?

Many thanks

 

[Dowser]

Is this equity curve simulator of any use?

http://www.equitycurvesimulator.com/

 

[Edina]

Is this equity curve simulator of any use?

http://www.equitycurvesimulator.com/

Thanks very much cbrads. I am sure it does but unfortunately I'm not clever enough to work it out!

What I am thinking is, before compounding if you risk 1% and make 0.5% on that trade then that is a profit of 0.005%. So if you do that 2000 times a year then on a crude measure that is 2000 x 0.005% = 10% for the year.

However, what I am trying to work out is by what factor that 10% would be increased by when compounding is taken into account.

Can anyone help me please? Thanks much

 

[malaguti]

Thanks very much cbrads. I am sure it does but unfortunately I'm not clever enough to work it out!

What I am thinking is, before compounding if you risk 1% and make 0.5% on that trade then that is a profit of 0.005%. So if you do that 2000 times a year then on a crude measure that is 2000 x 0.005% = 10% for the year.

However, what I am trying to work out is by what factor that 10% would be increased by when compounding is taken into account.

Can anyone help me please? Thanks much

you might want to check your own maths, before even thinking of compounding

you risk 1%, so very crudely with a 100 losses in a row you have lost everything, but with 2000 wins you are only 10% up. does that sound right to you?

 

[darktone]

think they meant making .5% of the sum of the 1% at risk mal

 

[Dowser]

I think the average R:R is 1.255:1.25 or 1.004:1

 

[malaguti]

think they meant making .5% of the sum of the 1% at risk mal

then still compounding is the least of their issues!

 

[Edina]

you might want to check your own maths, before even thinking of compounding

you risk 1%, so very crudely with a 100 losses in a row you have lost everything, but with 2000 wins you are only 10% up. does that sound right to you?

Thanks for your response malaguti, despite the patronising tone.

You are not comparing like for like. You are comparing on one hand a situation where the losses are the 100% of the entire stake, but he wins are just 0.5% of the stake.

 

[malaguti]

Thanks for your response malaguti, despite the patronising tone.

You are not comparing like for like. You are comparing on one hand a situation where the losses are the 100% of the entire stake, but he wins are just 0.5% of the stake.

im only restating your own hypothesis
if you risk 1% and you lose that trade, how much do you lose?

 

[Edina]

im only restating your own hypothesis
if you risk 1% and you lose that trade, how much do you lose?

It's not a binary bet. A loss doesn't need to be 100% as far as I am aware. If a trade is placed for $1000 and it is closed at $950 then I am calling it a loss.

 

[darktone]

im only restating your own hypothesis
if you risk 1% and you lose that trade, how much do you lose?

But that 1% risk could be spread out from last price to zero, then you have 100 stabs at hitting your target before hitting your exposure limit

Edit: Or not! :cheesy:

 

[Edina]

I think the average R:R is 1.255:1.25 or 1.004:1

Thanks again cbrads. So how is the 1.004 ratio applied please?

 

[Dowser]

You put it in the box labelled: 'win:loss relation'

 

[darktone]

Im not so sure. I think .005 represents what the OP was suggesting.

Remove a zero and were starting to get some curve goin on

Remove another zero and weve the foundation of every self respecting fresh to the plate tarder . equityCURVE!