Compounding
Growth applied to a balance that already includes previous growth.
Also called: compound growth · compound interest
In plain language
Compounding means each period’s return is calculated on the new, larger balance. Gains generate gains, and the curve bends upward over time.
It works in reverse too. Losses compound against a shrinking base, which is precisely why drawdown recovery is so asymmetric.
In percentage-based risk models compounding is automatic: risking 1% of current equity means your dollar risk grows with the account and shrinks during drawdowns.
The formula
Compound Growth
Final = Starting × (1 + Rate)^Periods
- Rate
- Return per period, as a decimal
- Periods
- Number of compounding periods
Change the numbers
This is the concept as a working tool. Edit any field and watch what moves — that relationship is the thing worth remembering.
- Final Balance
- $16,084.37
- Total Growth
- $6,084.37
- Multiple
- 1.61×
Compounding rewards consistency far more than size. It also runs in reverse — a single large loss removes many periods of growth from the base the whole curve is built on.
See what a drawdown does to this curveWhy it matters
It reframes the goal from making a lot on one trade to avoiding the large losses that reset the base the whole curve is built on.
Common mistakes
- Projecting a good month forward indefinitely and treating the result as a plan.
- Ignoring that a single large loss removes many periods of compounding.
- Withdrawing gains while still assuming the compounded projection holds.
Keep exploring
These concepts are connected. Understanding one usually makes the next one easier.
The decline from an account’s peak value to its lowest point before a new peak.
The fixed share of your account you are willing to lose on any single trade.
The average amount you expect to win or lose per trade over a large sample.
The largest peak-to-trough decline an account or strategy has ever experienced.
A written set of rules defining what you trade, how you size it, and when you exit.