Risk & Money Management
Beginner
Compounding
Reinvesting profits so the next period's return is earned on a larger base — the mechanism behind exponential equity curves.
Definition
Compounding is what turns a steady % return into outsized long-term wealth. At 2% per month compounded, $10,000 becomes $26,800 in 5 years; at simple 2% per month it’s $22,000.
For retail traders using fixed-% position sizing, compounding happens automatically — risk per trade in $ terms grows with the account.
Formula
Future Value = Principal × (1 + r)^n