How does compound trading work?

Compound Trading: How To Build Your Profits

Everyone is looking for that magic method or tool that will allow them to make untold wealth and become financially free. Is compound trading a way for you to stack the profits?

In truth it requires a lot of hard work, a lot of time spent researching and learning then applying that knowledge.

More than likely you are going to fall many times and in those falls you’ll lose money too. 

There is no quick fix and those that try to convince you otherwise either got very lucky or are trying to scam you in some way.

With perseverance and discipline accompanied by a little luck and timing we can all do very well making our investments and money in general work for us.

Despite all of that there are some really simple and easy things that people can be doing to help maximise their portfolio potential.

One of those methods is compounding your profits.

What Is Compound Trading?

Compound trading is simply reinvesting the profits on the sale of an asset in order for you to potentially increase further profits through the injection of more capital.

This can obviously be done with the sale of any asset, with dividend payments or interest earned, but for now we are going to focus on trading. 

So if you buy an asset for 100 currency units and then sell it for a 10% gain you now have 110 currency units. Rather than taking that 10 currency unit profit out of the market you reinvest it in another trade. 

So for your next trade you will buy 110 currency units of an asset, this time when you sell for a 10% gain you will receive 121 currency units so your profits.

The idea is that over time you will increase your capital more quickly than merely taking out your profit each time and saving it.

Risk Factor

Reinvesting your profits poses its own risks in that the market can go against you and you stand to lose the profits you made on your previous trade. 

However, provided you are employing proper risk management and you have a well balanced portfolio then we believe the potential rewards are greater than the risk.

A tried and tested method to avert some of the risk would be to only reinvest half of your profits from each trade. 

Yes your trading pot would grow more slowly but by taking half the profits out of the market each time you are providing yourself with a risk free savings income.

If you were to put that savings income into a NEXO account or similar you could earn a very good interest rate on it. So you would still be earning and compounding just in a slower less risky manner. 

No matter how you do it, compounding your profits is a proven strategy to build your wealth at a faster rate.

Obviously at some point you will want to pull out some of your money and use it, but there are further non-traditional ways you can do this and still earn on your spending. But that’s for another article.

Check out the different styles of trading for your crypto or market investing.

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