Friday, November 27, 2015

The Power of Compounding

Yes, it's the very same thing that we all learned in school. However, in the heat of trading, we tend to forget this simple principle. So, here's a reminder. Consistently earning even a few points everyday will make a trader rich.

Below, I am pasting verbatim what I posted on the topic on my thread in Traderji. Note the need to deploy full capital to get the results indicated. As mentioned in the post, a high win % and low risk per trade would be great. However, I am now thinking that high Recovery Factor and low risk per trade would be a better criteria to give the confidence to deploy maximum capital.

Recovery Factor = (Net profit) / (Maximum system drawdown)

The Power of Compounding

NF is at 7700. If you are able to net 10 points per day, then you are earning 3.24% on margin on MIS basis, and 1.62% on NRML basis.

If you have a high win %, and low risk per trade, and deploy full capital on each trade, then with NRML your capital would have multiplied 24 time in an year. With MIS, then your capital would have multiplied 588 times.

I am assuming that you are able to trade 200 days in a year.

If you earn 0.1% of capital everyday, compounding your capital will make it 1.22 times after 1 year.
If 0.2%, 1.49 times.
If 0.3%, 1.82 times.
If 0.5%, 2.71 times.
If 1%, 7.32 times.
If 2%, 52 times.
If 3%, 369 times.
If 4%, 2550 times.
If 5%, 17292 times.
If 6%, 115125 times.
If 7%, 752931 times.
If 8%, 4838949 times.
If 9%, 30570292 times.
If 10%, 189905276 times.

Get the drift? Now don't find excuses. Just do it  emoticon-tongue-src-wikimedia

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