An Experiment in the Power of Compounding

This article is written by Tim Young.

ABOUT THE AUTHOR: Tim Young is a FTSE100 Day Trader from the UK. You can follow him on Twitter @timcyoung999 or follow his trades on the social trading site Ayondo - his trader name is FTSETrading.

Albert Einstein described compounding as the eighth wonder of the world. A few years ago

when I was working in a completely unrelated job to trading, I thought about how I could harness the incredible power of compounded returns to conduct a financial experiment to see how much I could turn £200 into in as short a time as possible. (Important – Don't ever trade with money you can't afford to lose!) I downloaded a compound interest calculator onto my smartphone and was astonished at the potential returns. Let’s say you were spreadbetting the FTSE 100 and you had £200 in your account.

Armed with some basic technical indicators to indicate oversold and overbought conditions I set about trying to scalp 10 points at a time on the FTSE. Each time I achieved 10 points I increased the stake by 10%. Let’s say you started at £2 a point and increased the stake by 10% each time. If you were lucky enough to achieve that relatively modest points target each time, guess how much the stake would be after 100 trades?

Well the answer is an astonishing £42,265.28 per point. You’re probably thinking “Yes, but you’re never going to do 100 winning trades in a row!” Amazingly within about 3 months my account had grown to over £7000 and within another 6 months it was up to about £42,000. I had visions of being the richest man on planet earth!

Unfortunately after the total had increased to nearly £84,000, I took on far too much Leverage Leverage In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders In financial trading, leverage is a loan supplied by a broker, which facilitates a trader in being able to control a relatively large amount of money with a significantly lesser initial investment. Leverage therefore allows traders to make a much greater return on investment compared to trading without any leverage. Traders seek to make a profit from movements in financial markets, such as stocks and currencies.Trading without any leverage would greatly diminish the potential rewards, so traders Read this Term and the metaphorical tower I had been building came crashing down. Even though I was playing with “The House Money” after taking my own £200 out plus some of the profits, the emotional impact of losing money was devastating.

While I was at the peak of my success a wise person advised me to take out a lot of the money because “The Market has a way of calling back it’s loan.” How right he was!

The main 3 lessons I learnt from this experience were:

1. Don’t trade with money that you can’t afford to lose

2. Try to incorporate the power of compounding/exponential returns into your strategy

3. DON’T OVERLEVERAGE!

I have since gone back to the drawing board and totally redesigned my system, and am now consistently growing my FTSE 100 Day Trading account, but not nearly as fast as before!

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