Unraveling the bitter truth about compounding in trading

"I'll start with $100 and flip it to $10k" is one of the lies we tell ourselves when we first start trading. Although compounding can do some wonders, without realistic expectations and targets, you will not reach your goal.

Illustrated on the chart, we can see a sincere and deceitful statistical representation of a compounding system based on a year-long tracking. All numbers depicted in percentage-based returns are for example purposes.

For both cases, we will have a $5000 beginning capital to work with.

Looking at the left-hand side of the screen where the realistic statistics are, we can observe that the ROE (return on investment) numbers differ from one month to another. Some months result in a small loss, some are in deep profits and so on. Just like every single trade, every single month should result in the following:

- A big win

- A small win

- A small loss

- A breakeven

On the contrary, looking at the table portrayed on the right side of the screen, we can see a blurry image of compounding. Expecting to make a fixed return of 10% every single month is nice, but unrealistic. No matter how well-backtested your trading strategy is, in the world of business and finance, nothing is 100%. Plus, there are several factors influencing our trading life: changing market conditions, the negative impact of the surrounding environment on our everyday lives and so on. What we are trying to emphasise is that mentally and psychologically, it is impossible to make huge returns consistently on a monthly basis.

The bottom line: have a trading plan that fits your lifestyle the most, be disciplined, risk-tolerant, and cold-blooded. And most importantly do not rush the process, as good things come to those who wait.

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