**Forex Compounding Calculator** is the **Forex trading tool **that **calculates** the **profit** of next trade with **profit added** from previous trade to the initial account balance. At the end you get **exponential returns** on initial investment.

Contents

- 1 What is Compounding in Forex
- 2 Forex Compounding Rules
- 3 How To Use the Forex Compound Calculator
- 4 What is a Forex Compounding Calculator
- 5 Importance of a Forex Compounding Calculator
- 6 Compounding Plan Strategy
- 7 What is the Main Disadvantage of Compound in Forex
- 8 What are Pros of Compounding in Forex
- 9 What is the Best Compounding Frequency
- 10 FAQ

## What is Compounding in Forex

**Forex compounding** is the process of **using the profit** you make on one trade and adding it to your initial account to **increase the profit** on the second trade.

That means if you open one trade on a $10 000 account balance and that trade is a successful trade you will make $200 which is 2%.

**2% of $10 000 = $200**

Here is a more detailed explanation.

In Forex you trade Forex currency pairs like EUR/USD currency pairs, where you predict the price of EUR/USD moves up or down on the chart.

That means if the

**EUR/USD = 1.1234**

the price can move up to

**EUR/USD = 1.1235 **

or down to

**EUR/USD = 1.1233**

And when you make the correct decision you make money. The amount of money you make on that trade should be defined in percentage.

In our example above I have used 2% of profit on each trade.

So, at the end I have $10 200 in my trading account.

To compound this amount I will use $10 200 as starting balance on my second trade instead of $10 000 which was the starting balance for the first trade.

### Second Trade With Compounding

Now I have $10 200 as a starting balance. And if I plan to make 2% on the next trade I will make

**2% of $10 200 = $204**

You can see that my profit increases on the second trade because the starting account balance is larger.

And if the second trade is successful I will have

**$10 200 + $204 = $10 404**

You can see that in two trades I have taken with compounding I will have 4.4% with 2% on each trade.

It is not $10 400 which is 4% because I have used my profit on the first trade and included it in the starting account balance.

This is a compounding effect that increases initial account balance which increases profit on the second trade.

Here is a summary after two trades so we can move to the third trade.

**1st trade 2% of $10 000 = $10 200**

**2nd trade 2% of $10 200 = $10 404**

### Third Trade with Compounding

Now I have $10 404 as account balance and the trade with 2% of profit will give me:

**2% of $10 404 = $208,08**

And when I add that amount to the total account balance I have:

**$10 404 + $208,08 = $10 612,08**

After three trades I have $612,08 of profit which is **6,12%** increase in profit.

Now, let me explain the math behind the compounding.

## Forex Compounding Rules

To get the above results there are few rules you need to have in mind or you will not get the results you see in above or in the Forex compounding calculator.

**rule**– Always use the same percentage of profit on each trade. If you use 1% then always use 1% on trades you open**rule**– Each trade you open should be positive if you calculate compounding for each trade. If you use a time period instead of trade then you need to be profitable in that time period. That period can be day, week or month.**rule**– each profit of the previous period should be added to the account balance and calculate percentage gain from that account balance and not from initial account balance. If you started with $10 000 then the next period will include profit + initial balance for calculation

## How To Use the Forex Compound Calculator

Use Forex calculator compound by entering three important variables in the calculator and those are:

**1st variable** – initial investment

**2nd variable** – percentage of profit

**3rd variable** – time period

Enter these three variables in the Forex calculator compound and click on the button “**Calculate**“.

You will get the results in the table where you can see how much you would get after each time period.

### Forex Compound Initial Investment

With initial investment you define what will be the starting account balance the Forex calculator compound will start the calculation.

This initial investment will be increased in each time period with previous period profit. And that increased investment will be used in future calculations.

Have in mind that Forex calculator compound works with profit only. If you lose money in one time period the table with results will not be valid.

You will need to enter a new account balance as a starting investment and make the calculation again.

The Forex compounding calculator expects that you increase the investment each time period.

That means, if you start with $10 000 and you use a monthly time period, you need to make money that month. Not to lose the money.

So, you need to make at least the percentage you have defined. If that is 2% then you need to have $10 200 at the end of the first period.

If you make less, for example $10 100, which is 1% then you need to make the calculation again with the Forex compound calculator.

And then you will have $10 100 as initial investment.

### Forex Compounding Calculation Percentage of Profit

The second variable you need to define is the percentage you will make per each period. That can be 1%, 2% or any other percentage.

But, that means percentage of profit of account balance.

In my case I have used $10 000 as initial balance or initial investment. And I have opened three trades.

Those three trades can be in a day or in a week.

### Compounding Calculation per Time Period

Lets use **month** as a **time period** because monthly period is mostly used in calculating profits. Usually all traders want to see how they have traded when the month ends.

So, the time period is a **month**.

You select the percentage of profit in a month. That can be** 1%** **per month** or **2%** **per month** or any other percentage as I have already mentioned.

## What is a Forex Compounding Calculator

Forex Compounding Calculator is the **tool** that **calculates** the **profit** of next trade with **profit added** from previous trade to the initial account balance.

The formula behind the compounding calculator is here.

**A = P(1+r) ^{t}**

**Principal or Initial balance (P)**= 10 000**Percentage or Rate as decimal (r)**= 2/100 = 0.02**Time period (t)**= 3

Time period can be day, week, month or any other period you want to calculate compounding results.

Let me show this formula on example from above where I had $10 000 as initial balance so

**P = 10 000**

and 2% of profit on each trade so

**r = 0.02**

Time period will be the number of trades. In my case I had 3 trades so

**t = 3**

### Forex Compounding Calculation

Let me show

**A = P(1+r) ^{t}**

**A = 10 000 (1 + 0.02) ^{3}**

**A = 10 000 (1.02) ^{3}**

**A = 10 000 (1,061208)**

**A = 10 612,08**

Now, when I make each trade separately you will see how I have got the above result.

Here is the step by step of the Forex calculator compound with the compounding rules I have mentioned above.

Rules:

**rule**– Always use the same percentage**rule**– Each trade you open should be positive**rule**– each profit of the previous period should be added to the account balance

1.st trade with 2% of $10 000

**A = P(1+r) ^{t}**

**A = 10 000 (1 + 0.02) ^{1}**

**A = 10 000 (1.02) ^{1}**

**A = 10 000 (1.02)**

**A = 10 200**

2.nd trade with 2% of $10 200

**A = P(1+r) ^{t}**

**A = 10 200 (1 + 0.02) ^{1}**

**A = 10 200 (1.02) ^{1}**

**A = 10 200 (1.02)**

**A = 10 404**

3.rd trade with 2% of $10 404

**A = P(1+r) ^{t}**

**A = 10 404 (1 + 0.02) ^{1}**

**A = 10 404 (1.02) ^{1}**

**A = 10 404 (1.02)**

**A = 10 612.08**

## Importance of a Forex Compounding Calculator

As you can see when you add the profit of previous trade to the calculation for the next trade you increase the profit on the next trade.

And you use the same percentage of profit. If that is 2% it stays the same all the time, but the profit increases.

Compounding in Forex increases the account balance so that is why it is important to use it in Forex trading.

If you take a look how the compounding in Forex looks for higher time periods then you will see that compounding in time gives you huge returns.

And by huge I do not mean linear increase like this below where I have used 30 trades with 2% profit calculation.

### Linear Calculation

You can see how important compounding in Forex is when you use linear and compounding calculation.

In 30 trades, or 30 day or 30 months, you define which time period you want to use, you can see how the amount will change.

Linear calculation gives you an increase in profit of $6000. So, if you use the 30 months period you will make $6 000 on a $10 000 investment.

**30 periods = $6 000 on $10 000 investment**

### Compounding Calculation

When you use same conditions as with linear calculation and that is 2% of profit, $10 000 initial investment and 30 month time period you get this:

**30 periods = $18 113,62 on $10 000 investment**

You can see how important compounding calculation is in Forex trading. It gives you huge returns which you could not get with linear investment.

## Compounding Plan Strategy

Strategy should include these steps:

**Step #1** – choose currency pair for trading

**Step #2** – define lot size you will use

**Step #3** – define stop loss and take profit levels

**Step #4** – define risk per each trade, Risk:Reward

**Step #5** – define time period you will use in Forex compounding plan

Below is the graph what would you make if you use 10 pips risk per each trade daily.

To achieve that you would need to use Forex trading plan and for that I have made an article that will show you Forex compounding plan to achieve that.

## What is the Main Disadvantage of Compound in Forex

**Main disadvantage of compound interest** in Forex is that it is hard to have a constant percentage of profit in a certain time period.

Is it not easy to find a strategy that will give you profit each month with a guaranteed percentage. If that is easy then all of us would be rich with Forex trading.

And for example, if you have a time period of a month with 2% target you would need to open at least one trade that would bring you 2% of profit.

That would look like this:

**1 trade with 2% of $10 000 = $200**

If you open two trades then both trades would need to be positive or at least one positive and second trade without loss.

That would look like this:

**1st trade – 2% of $10 000 = $200**

**2nd trade – 2% of $10 000 = $200**

**TOTAL = 4% of $10 000 = $400**

In second case when one trade is positive with 2% of profit and second one is without loss:

**1st trade – 2% of $10 000 = $200**

**2nd trade – trade exited at the same price you have entered. So there is no loss**

**TOTAL = 2% + 0% = 2% of $10 000 = $200**

But, if it happens that you open two trades and one is positive and second one is negative you would end up with:

**1st trade – 2% of $10 000 = $200**

**2nd trade – -2% of $10 000 = -$200**

**TOTAL = 2% – 2% = 0% of $10 000 = $0**

One thing to note here is that you need to pay attention not to lose on each trade more than you will gain per trade. That means the risk you will calculate in the trade with 1% of profit cannot be more than 1%. If you have Risk:Reward ratio 1:1 or **1:2** you could end up at zero at the end.

But, if you use **Risk:Reward** = 1:0,5 then you would lose more per trade than you would make when the trade is positive. This is a bad trading decision so I would not suggest going into Forex trading as a beginner with **Risk:Reward less than 1:2**.

## What are Pros of Compounding in Forex

The main advantage or pros for Forex compounding is the result of the investment after a certain period where you make more after each month with the same percentage.

In the example from the graph above you can see that each month with the same percentage of profit you end up making more.

For example let’s take the profit you make with 2% after the first month with your initial $10 000 investment.

**2% of $10 000 = $200**

And lets take the profit with 2% after the fifth month with the account balance after four months.

**2% of $10 824,32 = $216,49**

You see, after making $200 after the first month you will make $216,49 after the fifth month. That is a difference of $16,49 without any changes.

**$216,49 – $200 = $16,49**

But only using compounding calculators in your trading.

## What is the Best Compounding Frequency

**The best compounding frequency** is **weekly** frequency that gives you **4 times more** than monthly frequency.

But, the best compounding frequency depends on the trading results you can achieve. If you have a good trading strategy with good results then you can make a lot of money quickly.

Let’s put numbers on the table to explain to you which compounding frequency is the best.

I will assume I can get 1% per each trade I open. And that means I do not have any bad trades.

To give you a rough overview of how that would look on a weekly basis check this out. If I open 1 trade per day throughout the week I will make 5%.

**Monday – 1%**

**Tuesday – 1%**

**Wednesday- 1%**

**Thursday – 1%**

**Friday – 1%**

Now, If I take the same results for four weeks per month I would end up with 4% at the end of the month.

**4 x 1%/week = 4%**

And when I take same scenario and put it on a monthly basis I would get this:

**1 x 1%/month = 1%**

Here is a table that shows you what I mean by having different compounding frequencies.

The table above shows you three different compounding frequencies.

**Daily compounding frequency** – each day you make 1% and next day add this amount to initial balance

**Weekly compounding frequency **– each week you make 1% and next week add this amount to initial balance

**Monthly compounding frequency** – each month you make 1% and next month add this amount to initial balance

**Annual compounding frequency** – each year you make 1% and next year add this amount to initial balance

In the first column, which is the daily compounding frequency, you have the amount of money after the first month. Each row represents one month.

That way you can see where the difference is between how much money you can make each month if you compound with daily, weekly or monthly frequency.

Second column shows you weekly compounding frequency and the amount of money you will have at the end of that month.

Third column shows you monthly compounding frequency and how much money you would have at the end of that month.

Fifth column where the annual compounding frequency is shows you one year with 1% of profit. It is a small amount but it is a very conservative approach with conservative return.

### Which is Better Compounded Daily or Annually?

By simply checking the end of the year you can see that you would make more than 1000% if you have daily compounding frequency compared.

**$108.925,54 is >1000% of profit**

So, you see that annually compounding results would give you only 1% return on $10 000 investment.

**$10.100,00 is 1% of profit**

So, if you can, the best is to have daily compounding frequency. But is that really possible?

Can you make 1% of profit without having a bad day? Hard, but not impossible.

### Is it Better to Compound Monthly or Annually?

Now, if you compare monthly return with annual return you see that monthly return has more than 10% of return and annually has only 1%.

**$11.268,25 is >10% of profit**

Compared to annually return

**$10.100,00 is 1% of profit**

I can say for sure that I would like to have a monthly return more than annually. And I can say that monthly returns are possible to reach if you have a good trading strategy.

### What’s Better Compounded Monthly or Daily

Monthly or daily compounding shows you that daily compounding is better than monthly with more than 20% of profit at the end of the first month.

**$12.201,90 is >20% of profit**

And for the first month you would make only 1%

**$10.100,00 is 1% of profit**

But, if we compare daily compounding with monthly compounding at the end of the year we get this for daily compounding

**$108.925.54 is >1000% of profit**

and we get this for monthly compounding

**$11.268,25 is >10% of profit**

You can see that **daily compounding** has more than **1000%** of profit compared to more than **10%** of profit on **monthly compounding**.

### What’s Better Compounded Weekly or Daily

Let’s compare weekly compounding and daily compounding.

At the end of the first month we would have 4% of return on weekly compounding

**$10.406,04 is >4% of profit**

If we check daily compounding at the end of the first month we get

**$12.201,90 is >20% of profit **

So, the **daily compounding** with **>20%** of profit is better than **weekly compounding** with **>4%** of profit at the end of the first month.

## FAQ

### Compound Interest is the Eighth Wonder of the World

Compound interest is the eight wonders of the world with exponential return where you reinvest what you have earned.

No wonder why Albert Einstein said that there are eight wonders of the world.

When you see what you can achieve with a compound growth calculator then the sky’s the limit.

### Compound Effect Graph

The best compound effect graph is the one below where you can see how three different compounding effects have different results.

You can see a 1% compounding effect graph which is shown with a grey line at the bottom.

Then you have a 5% compounding effect graph with a brown line in the middle.

And a 10% compounding effect graph as a blue line on the upper side.

You can see that the higher percentage compounding effect starts to increase exponentially earlier than the lower percentage compounding effect.

### How to Compound Money Fast

Compound money fast by increasing the percentage return to have at least 10% or more. Higher compounding percentage return will give you quicker exponential return.

Second thing you need to do to compound money fast is to use a shorter time period. Time period defines how fast you will use percentage growth.

Will that be on each trade or will you use daily compounding effects?

If you use compounding growth calculators on each trade then you can have several trades per day and after each trade you can grow your account.

Check the graph below where I have set the percentage return to 50% and time period as a day.

That means you trade 10 days with $1000 invested and each day you make 50%.

### A Penny a Day Compounded for a Year

If you ever wonder how a penny a day compounded for a year then here is the graph that shows you the result.

**1% – $0,378**

**2% – $13,77**

**3% – $484,83**

**4% – $16.488,03**

**5% – $542.118,42**

**A penny a day compounded for a year** with 5% return per day would give you **$542.118,42**. Half a million with a penny per day in a year.

### Does Compound Interest Work in Forex

Compound interest works in forex by adding each time period return to initial investment to grow the account balance exponentially.

You could see that different time periods and percentages in compounding calculations give different results.

Below is the table with different results on $10 000 investment.

You can use different compounding frequencies and see how compound interest works in Forex trading.

### How do You Become a Millionaire With Compound Interest

You become a millionaire with compound interest by investing $10 000 and make 10% each day through 49 days.

Here is how that would look.

You would invest 10% each day and add that return to initial investment. After 49 days you would have:

**49 days with 10% compounded = $1.067.189,57**

This approach would make you a millionaire with compound interest.

### How do You Find the Compound Frequency

To **find the compounding frequency** you need to **use the CAGR formula** which is compound annual growth rate or **compound growth calculator**.

**ROI(CAGR) = ((Ev / Bv) ^{1/n }– 1)*100**

**Ev – ending value**

**Bv – beginning value**

**n – number of time periods**

The CAGR is a reverse process compared to compounding calculators where you search for compounding frequency after you have initial investment and end balance after a certain time period.

Here is an article where you can find more details about CAGR formula in excel.

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