The Power of Compounding in Trading
Compounding means reinvesting your trading profits back into your account balance, which increases the size of your capital base. Because your position sizing scales with your balance, each subsequent win generates a larger dollar profit than the last.
The Mathematical Formula
To compound capital manually, use the standard compounding growth equation:
Ending Capital = Starting Capital × (1 + (Period Gain × Reinvestment Rate)) ^ Periods
Reinvesting vs. Withdrawing
Traders who withdraw profits regularly (e.g. to fund living costs) miss out on the compounding curve. While withdrawing provides immediate cash, leaving profits in the account allows you to trade larger sizes without risking a higher percentage of your balance.