Compounding

With compounding, returns are earned on the growing balance rather than only on the starting amount. In trading, this happens when position sizes are set as a percentage of current equity: after gains, the same percentage means a larger position; after losses, a smaller one.

• Ending balance = starting balance × (1 + return per period) to the power of the number of periods

Example

Illustrative figures: a $10,000 account that gains exactly 2% every month for 12 months.

• Simple (non-compounded) growth: 12 × 2% = 24%, ending at $12,400.
• Compounded growth: 1.02 to the power 12 ≈ 1.268, ending at about $12,682.

The difference grows with time. Over five years at the same steady rate, compounding gives about 3.28 times the starting balance, against 2.2 times for simple growth.

Compounding works on losses too

Losses compound in the same way, and recovering from them takes a larger percentage gain:

• A 10% loss needs an 11.1% gain to recover.
• A 20% loss needs a 25% gain.
• A 50% loss needs a 100% gain.

A month of +10% followed by a month of −10% leaves the account 1% lower, not unchanged: 1.10 × 0.90 = 0.99.

Common misconception

Compounding tables usually show smooth, steady returns. Real trading returns are uneven, include losing months and depend on whether any edge exists at all. Projections that compound a high monthly return over several years produce dramatic numbers that bear little relation to what most retail accounts achieve; regulators in the UK and EU require CFD providers to publish the percentage of retail accounts that lose money, and it is typically a majority.

The compounding calculator lets you test assumptions, including losing periods, and our guide to realistic trading returns and compounding puts the numbers in context. See also drawdown.