Vestaforex
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The importance of compound interest in money management
Definition: A capital is invested at compound interest when the interests of each period are incorporated into the capital to increase gradually.
Consider a trade in forex as an example of the period.
A trader wants to can risk 1% of his initial capital on each trade. So with a capital of 1 000 000$ he is going to risk $ 10 000 on each trade. Suppose he wins 10 positions in the year of 20 000 $ each, and lost 10 positions of 10 000 $ each. His final gain will be (20 000*10)-(10 000*10)=100 000 $.
Now imagine that this same trader also decides to risk 1% of his capital on each trade and that after each win and each loss he updates his risk. So after losing his risk taking will be weaker after each win the risk will be higher.
Using compound interest with the same 10 winning positions and 10 losing positions the final result is now 102 436.70 $ a gain of further 2 436.70$. This does not seem huge but on the long run the difference is huge!!!
After 10 years without using the compound interest the final capital is 2,000,000$. With compound interest the final capital is 2 651 774.78$ a difference of 651 774.78$! Imagine over a lifetime…
I think a lot of people knew the principle of compound interest but it is a good feature to remember to improve results.
Definition: A capital is invested at compound interest when the interests of each period are incorporated into the capital to increase gradually.
Consider a trade in forex as an example of the period.
A trader wants to can risk 1% of his initial capital on each trade. So with a capital of 1 000 000$ he is going to risk $ 10 000 on each trade. Suppose he wins 10 positions in the year of 20 000 $ each, and lost 10 positions of 10 000 $ each. His final gain will be (20 000*10)-(10 000*10)=100 000 $.
Now imagine that this same trader also decides to risk 1% of his capital on each trade and that after each win and each loss he updates his risk. So after losing his risk taking will be weaker after each win the risk will be higher.
Using compound interest with the same 10 winning positions and 10 losing positions the final result is now 102 436.70 $ a gain of further 2 436.70$. This does not seem huge but on the long run the difference is huge!!!
After 10 years without using the compound interest the final capital is 2,000,000$. With compound interest the final capital is 2 651 774.78$ a difference of 651 774.78$! Imagine over a lifetime…
I think a lot of people knew the principle of compound interest but it is a good feature to remember to improve results.
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