Most people will overestimate what they can do in the short-term, and underestimate what they can accomplish in the longer run. This is also true in Forex and CFD trading, where most retail traders are very hungry and in great need of generating quick profits. I know this first hand from my 2009-2016 stint with FXCM and being a trader myself since 2006.
As an example, most rookie traders feel an urge to trade every day like trading was a 9 to 5 job, and they want to see profits by the end of every month. However, trading is not like flipping burgers at your local burger place or a typical office job, and profit by the end of every month or year is far guaranteed. In fact, 80% of retail traders lose money, so using the same tricks as the average retail trader will probably not bring home the bacon.
But there is one solution, and that is to take a long-term view, and in this article, I will show you the wonder of compound interest and its long-term benefits.
I will use my 34.5% geometric percentage return per year of the last four years as a base for my calculations.
For the sake of argument, say that I invested $50,000 into an FX and CFD trading account in November 2014, and I don’t add or withdraw money, how much will I have returned by 2024?
The calculator below shows that in 2015 and my first full year of trading, I would have produced a return of $18,124, which is a below average income of inner London where I am based. Yet by the end of 2024, I will be producing an average return of $212,006 per year, which is 4.7 times the average inner London salary of approximately $45,000 per year, and if I trade for just two more years my expected return would be $383,525 per year! This is compound interest at work and explains why short-term loans of $100 to $1000 can quickly turn into a headache. As an example, a $1000 loan at Sunny.com, will after one year cost you 12,214.
Let’s take a look at a different example. According to Finance Magnates, the average deposited amount to a trading account in September 2018 was $3986. This will represent our average investor, but we will make a twist. The average trader will also add $150 per month to their account as they are saving up for their pension, and they start to trade in 2019. The expected return in the first year will be $1696.34, but by the end of 2028, the same trader will be making a gain of $48,463 per year, and a total profit of $168,209 on their $21,986 total investment. Add another ten years, and the 2038 income will be 973,945. The only caveat is that the 34.5% return per year might not hold up.
Now, it is your time to check out the calculator and see how compound interest works. Please note that clicking on the link will take you to a third-party site: Click here to load the calculator