Understanding Forex - #5 - Compound Interest
This is a series of articles on the foreign exchange market. You will learn here what Forex is, how it works and how profitable it can be. The entire series contains the following articles. . .
- What is Forex?
- Technical analysis
- Fundamental analysis
- Money management
- Compound interest
Compound interest.
As an investor, time can be your best friend once you learn how to use compound interest to your advantage. This is an important aspect of any trading system. Increasing your profits can make you very rich and help you increase your investment profits exponentially.
The downside to this technique is that you may also increase your risk. By reinvesting your earnings you can multiply your profits but you can also suddenly lose everything.
I will explain here how compounding can make you rich. I will also describe some of the risks involved. This strategy may be suitable for some investors, but not for all. It is more like a long-term strategy. Most traders or investors don't have the patience to undergo these types of strategies, but they could easily be profitable.
Remember this sentence: & # 8220; Anything that can grow exponentially can explode. & # 8221; By explosion here I mean rapid multiplication, rapid rate of growth. The important word is exponential.
If you could double your money ten times in a row and start with a thousand dollars, the tenth time you would become a millionaire. This means that if you invest $ 1,000 and double it, then invest $ 2,000 and double it, then you do it again and again, you will be a millionaire when you double your money for the tenth time.
Can you understand the power of compound interest? We are not talking about a specific time frame above, but the average time it takes to double your money is very important. For example, if you can double your money every month and start with $ 1,000, it will take you less than a year to become a millionaire.
Some people try forex, but it's very, VERY risky. There are other, more conservative goals, however. For example, if you could double your money ($ 1,000) every 6 months, you would become a millionaire in about 5 years. If you could double your money ($ 1,000) every year, it would take you about 10 years to become a millionaire.
Compound interest is one of the & # 8220; secret paths & # 8221; to wealth, but some people get greedy and lose their shirts. Also, there are some inherent risks to this technique which I will explain below. First we describe the rule of 72 which is very important to understand how profit compounding works.
The rule of 72 is useful for calculating when your money will double at a given interest rate. If you want to find out how long it takes to double your money, simply divide the annual interest into 72. For example, if you get 12% on an investment and that rate remains constant, your money will double in 72/12 = 6 years.
You can also calculate the interest rate if you know how often your money will double. If you are told that your money will double every 5 years, the annual interest rate will be 72/5 = 14.4%. This is a rule of thumb. Gives approximate results.
Now, capitalizing on your Forex profits can be risky. You can use proper money management techniques, such as the ones I explain in other articles in this series, to control some, but not all, of the risks. That's why it's important & # 8220; never trade more than what you can afford to lose. & # 8221;
The important question is whether this strategy is right for you or not. It depends on you. Some traders and investors combine both short and long term strategies. They can also increase some of their profits.
Whether or not you increase your profits, this is your choice. My purpose in this article was to show you how important compound interest is and how profitable it can be. You can learn other trading strategies and aspects of Forex trading from my other articles.