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What is Forex Compounding Calculator

2020-12-16

2020-12-16

What is a Forex Compounding calculator? How to use it and why is it important?Oleg Tkachenko

One of the most frequently asked questions in Forex is the reinvestment policy. If, for example, interest on deposits is paid after a fixed period, then the profit amount is known after each Forex transaction.

What should you do with the profit? Should you withdraw the profit to lower the risk or invest it in trading? What is better: ‘a bird in the hand’ or a potential increase in the deposit? How much can you earn with such a strategy in a month, for example?

An online compounding calculator forex will help you. If you want to know how to calculate forex profit, you can use the financial Forex profit calculator to:

  • Calculate compound forex interest earnings based on increasing the deposit balance by adding the profit received. The trader calculator also calculates the yields, including withdrawals or depositing.
  • Find out how soon you can achieve profit targets with or without reinvestment.

Read on, and you will know how you can use the forex compounding calculator. It will be interesting and useful!

The article covers the following subjects:

What is a forex compounding?

One of the methods to assess the efficiency and performance of a trading strategy is to analyze its profit/risk ratio. The performance in terms of certain periods can be seen in the backtest.

The tester suggests that you trade only with the main deposit amount; it doesn’t consider the profit. There are two questions:

  • What if the profit is also put into trading - reinvested? This will allow you to increase the position volume and earn even more. And with what frequency then to carry out reinvestment - once a day, a week, a month?
  • Is the procedure worth it? The constant withdrawal of profit in Forex at least up to an amount equal to the starting capital minimizes risks. How much more will you earn with the reinvestment strategy, and does it make sense to risk and not to withdraw the money from time to time.

These questions are the elements of a trading approach based on finding a balance between the pursuit of deposit acceleration and control of the risk level. The forex compounding interest calculator with capitalization and depositing is one tool that helps traders answer these questions using mathematical methods.

Forex Compounding Calculator is a tool that helps traders calculate the earnings according to the specified parameters:

Reinvestment is a way to rapidly increase the deposit. That is why the forex compounding calculator of interest capitalization is most commonly used when building high-risk trading strategies. For example, they could be trading the [Martingale way][1], pyramiding, and so on.

How does forex compounding calculator work?

The Forex compounding calculator is based on the standard capitalization formula. You specify the amount of the initial deposit, monthly profitability, and the number of re-investments. For example, the investment period is a year, the number of reinvestments is 4.

  • In the first quarter, the Forex profit calculation shows the profit for 3 months from the initial deposit amount.

  • In the second quarter, the income of the first quarter is added to the initial deposit, and the result is calculated based on the new amount.

  • In the third quarter, the amount of income for both quarters is added to the initial deposit, and the result is calculated.

  • In the fourth quarter, the amount of income for the three previous quarters is added to the initial deposit, and the result is calculated.

According to the forex income calculator, profit grows in arithmetic progression without reinvestment, with reinvestment - in geometric progression. Profit for each subsequent period is calculated based on the amount of the initial deposit and income for the previous periods. So you can easily find out your potential gain using a forex income calculator.

How do you calculate compounding interest?

The compounding interest is calculated according to the following:

Where:

  • S is the amount that the trader will receive at the end of the investment period.
  • D is the initial deposit amount.
  • r is the expected annual yield of trading. You can take this value in the results of the testing on the historical data.
  • n is the number of reinvestments during a year. For example, if the gain is added to the deposit once a month, n=12.
  • t is the number of years. For example, for the investment period of six months, t=0.5.

The period of a year is not the only reference period. For example, r can correspond to the strategy’s profitability for 1 month. But then, for the investment period of 6 months, t = 6; with reinvestment once a week, n = 4.

Example one (net profit without reinvestment).

Input parameters:

  • Initial deposit is 100 USD.

  • Average profitability of the trading system is 5% per month.

  • Investment period is three months. You are not meant to withdraw or deposit the money. 

In six months, the account balance will be S = 100 + 100 * 0.05 * 3 = 115 USD. Profit - 15 USD.

Example 2 (with reinvestment). Input parameters are the same, but the profit is reinvested each month.

  • Profit for the first month: 100*0.05 = 5 USD.

  • Profit for the second month: (100+5)*0.05 = 5,25 USD.

  • Profit for the third month: (100+5+5.25)*0.05 = 5.51 USD.

The total profit over three months — 15.76 USD, the deposit amount - 115.76 USD, according to the forex calculator profit.

The calculation is the same, but there is used the compound interest formula:

S = 100 * (1 + 0,15⁄3)^3 = 115,76, where

  • 100 — initial deposit.
  • 0.15 — interest rate. The entire investment period is 3 months, so the yield is 5% per month, r = 0.05*3.
  • 3 — number of reinvestments.
  • t = 1.

Because of the reinvestment in the second example, the trader earned over three months a profit that is 0.76 USD more than that if without reinvestment.

To calculate the total profit from Forex trading with reinvestment, you can build an Excel model. But it is easier to use a calculator that already has this model.

Forex profit calculator

If you build a Forex trading system with a reasonable risk-management model, you should answer the following questions:

  • What is the relevant position volume, based on the initial deposit?

  • What are reasonable stop loss and take profit levels, according to the strategy?

  • What is the acceptable risk per trade and for all open positions?

To answer these questions, you need to know the pip price, margin level, potential profit, and so on. You can calculate all those parameters manually or in Excel. Suppose you are a beginner trade, will you calculate the parameters manually, and how soon will you get confused with the numbers? Here, you had better apply the Forex profit calculation.

Forex profit calculator or the trader forex compound calculator is an essential tool that helps you:

  • Calculate the pip value based on the position volume and the currency pair (or any other trading asset).

  • Calculate the correct position volume according to the particular trading strategy.

  • Estimate the risk level according to the financial leverage.

  • Calculate the total profit based on the position volume of the particular trading asset, including the swap and spread in pips and currency units.

  • Calculate the margin amount for a trade.

You enter the trading account type, account currency, leverage size. You also enter the currency pair and the trade volume, exchange rate. Finally, you get the result:

If you change the input data, you will see how the margin changes depending on the leverage. You will also see how the pip value and the profit change along with the position volume. Thus, you can instantly learn how much you can earn on the instrument’s average daily volatility, including the spread and the swap.

Try yourself how a trading calculator works using the one below:

How to calculate the profit using the compounding interest

calculator?

Now, I will demonstrate how to use the online forex compounding calculator. We enter the same input data as we used for the manual calculation. The initial deposit is 100 USD, the expected monthly profit is 5%, the investment period is three months.

The advantage of the forex compound calculator is that you can also include the monthly deposit or monthly withdrawal. In our example, these are zero. We get the result:

Monthly division of the trading system’s profitability and the total balance profit. It clearly shows how fast the profit is growing with or without reinvestment. Without reinvestment, the monthly profit would be 5 USD.

One of the drawbacks of the Forex compound interest calculator with reinvestment is that it suggests adding profit to the balance only once a month.

To calculate the income when reinvesting once a week with the same input data, you will have to perform several mathematical steps. For example, instead of 3 months, enter 4 * 3 = 12, instead of 5% profit every month - 5⁄4 = 1.25. That is, the dimension of the value in the “Investment Period” window does not have to be indicated in months. But it must necessarily match the dimension of the value in the “Monthly Profitability” window.

This example shows: the more often you reinvest, the higher your profit is by the end of the investment period. Without reinvestment, the profit in 3 months is 15 USD. With the reinvestment once a month, the profit is 15.76 USD. If you reinvest once a week, you will have a profit of 16.08 USD in three months.

Another drawback is that the interest compound calculator forex takes into account only the average withdrawal with a division into periods. For example, it is supposed to invest $100 for 12 months with a withdrawal of $ 50 after 6 months. There are 2 options:

  • In the ‘Investment Period’ window, you specify 12, in the ‘Monthly Withdrawal’ section, you enter (50⁄12) 4.17.

  • Divide the calculation period into 3 parts and calculate the profitability for each part separately: for 5 months without withdrawal, for 1 month in which there will be withdrawal, for the next 6 months without withdrawal. The initial deposit for each part of the period will be different.

The second financial calculation is more correct in mathematical terms. But if you are a beginner, you can get confused about the numbers.

  • Conclusion. The Forex compound interest calculator is not universal, but it makes it easier and faster to calculate the expected profit than using Excel.

Importance of a forex compounding calculator

The Forex compounding calculator calculates interest earnings over the investment period, total profit including reinvestment, and the account balance at the end of the investment period including partial depositing or withdrawal of funds.

The forex compound calculator is also used to:

  • Calculate the initial deposit to trade Forex, which will allow you to reach the target profit after a particular time when you know the system profitability. For example, how much the initial deposit should be to earn $ 5000 in a year if you reinvest and your trading system yields 5% a month.

  • Compare the aggressiveness of several strategies when using different instruments. For example, which strategy suggests a faster increase in the deposit amount, trading the Martingale way or pyramiding, for instance. 

  • Estimate the rate of deposit growth. For example, how much it will take you to double your deposit amount if you reinvest.

  • Clarify the differences in the Forex trading strategies with and without reinvestment. It defines how often you should reinvest the profit.

The forex compounding interest calculator is a tool to plan future money flows and identify profit targets; it is also the trading system performance indicator. Besides, it will facilitate your Forex trading calculations.

Forex compounding calculator and trading strategies

Example 1. The initial investment is 1000 USD. You are going to trade with an Expert Advisor based on the Martingale, which yields an average monthly profit of 25%. You know that it is a high-risk strategy; it could produce a loss in the investment period of twelve months.

What should you do? Should you reinvest the profit and withdraw all funds at the end of the investment period? Or should you withdraw a particular amount along with the reinvestment?

You analyze both variants:

  • Without reinvestment. You calculate the expected profit without reinvestment. 1000 * 0.25 * 12 = 3000. After 12 months, the balance will be $ 4,000.

  • With reinvestment. You calculate the balance amount with the Forex compound interest calculator. It will be 14,551.92 USD.

You understand that it is tempting to reinvest the profit since the deposit in the second case will increase by 14.5 times, in the first - only by 4. But the strategy can fail at any time. And the longer the EA works, the higher the risk of failure is.

Then you select the monthly withdrawal amount that will be comfortable for you. You can also calculate the right amount to withdraw using the Forex compounding interest calculator. For example, $200.

With this strategy, you will withdraw the initial deposit amount in 5 months, thereby reducing the risk for the remaining 7 months. And ultimately, after 12 months, you will earn the same amount on your account balance as you can with the strategy without withdrawing money and reinvesting.

  • Conclusion. In terms of risk optimization and optimal profitability, the best strategy would be the “golden mean” - partial reinvestment with a monthly withdrawal of a part of the profit, for example, $200.

Example 2. You have $ 100. According to the strategy tester, the average profitability of a conservative strategy for 5 years is 5% per month. The investment period is 1 year.

With reinvestment, you will gain $79.59, but all money will be blocked in the account for 1 year. Without reinvestment, you can withdraw $5 every month, profit for the year will be $60. Does it make sense to risk for $19.59?

  • Conclusion. In conservative strategies, it is better to follow the “bird in hand” rule. For small deposits and low-profitability strategies, reinvestment does not justify the risks.

Frequently asked questions

Can I trade Forex with $100?

Yes. The trade amount depends on:

  1. The asset type and the exchange rate.
  2. Leverage and trade volume.
  3. Risk level, you choose.

Example. The

[EURUSD][2]

exchange rate is 1.20000. The minimum lot is 0.01. It means that I buy 1000 EUR for 1200 USD.

I use the maximum leverage of 1:500. So, to buy 1000 euro, I need only 1200⁄500 = 2.4 USD.

In theory, with a deposit of 100 USD, I can enter a trade of 0.4 lots (100,000 * 1.2 * 0.4 / 500 = 96 USD), but this would contradict the risk management rule that you shouldn’t risk more than 5% of the deposit per trade. Since 5% of 100 USD is 5 USD, with a deposit of 100 USD, the optimal transaction volume is 0.02 lot or 4.8 USD.

How is Forex Trading size calculated?

When you calculate the maximum allowable trade volume, you should take into account the following input parameters:

  • Deposit amount.
  • Asset type and the current exchange rate.
  • Maximum leverage.
  • Acceptable risk level. The risk-management rules recommend you not open a position more than 5% of the deposit. The total risk for all positions should not exceed 15% of the deposit.
  • Target profit. Aggressive traders could increase the risk level contrary to risk-management rules to accelerate the deposit faster and increase the profit.

You can study in detail how to calculate an optimal position volume in the article

[What is a lot size and how to calculate a lot in Forex][3]

.

How to compound your forex account?

  1. Reinvest the profit. Thereby, you will increase the initial deposit, which, in turn, will yield a greater return. The profit amount will grow not in arithmetic, but a geometric progression, and the forex interest calculator will instantly display it.
  2. Use deposit acceleration strategies like averaging, Martingale, pyramiding.
  3. Enter trades with the maximum leverage and maximum lot. Provided you are lucky and can professionally analyze the market; such a strategy can help you multiply the initial deposit quite rapidly. However, the risk-management rules strongly suggest not to do it.
  4. Algorithmic trading with EAs designed to quickly increase the deposit, for example, grid EAs.

You can try yourself and start with the Forex trading systems covered in the article

[Three most effective Forex trading systems][4]

.

P.S. Did you like my article? Share it in social networks: it will be the best “thank you” :)

Ask me questions and comment below. I’ll be glad to answer your questions and give necessary explanations.

Useful links:

  • I recommend trying to trade with a reliable broker [here][5]. The system allows you to trade by yourself or copy successful traders from all across the globe.
  • Use my promo-code BLOG for getting deposit bonus 50% on LiteForex platform. Just enter this code in the appropriate field while [depositing][6] your trading account.
  • Telegram chat for traders: . We are sharing the signals and trading experience
  • Telegram channel with high-quality analytics, Forex reviews, training articles, and other useful things for traders

The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.

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  1. www.liteforex.com/blog/for-beginners/martingale-in-forex-pros-and-cons/
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  3. www.liteforex.com/blog/for-beginners/how-to-calculate-a-lot-on-forex/
  4. www.liteforex.com/blog/for-beginners/three-most-effective-forex-trading-strategies/
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