Many people ask me ‘why not just hold a stock long term ?’ my answer is always ‘Because of compound gains!’ it is such a simple concept yet many many people do not realize how power full it is! Albert Einstein once said that the concept of compound interest is ‘the greatest mathematical discovery of all time’.
Compounding is the process of generating earnings on a stock or other assets reinvested earnings. To make this powerful money making technique work for you, you only need to be able to do two things – re-invest earnings from your investments and an understanding of the compounding concept.
To illustrate the concept just look at the graph below which shows a modest 5% profit per trade. Starting with a small account around $10,000 it only takes 50 trades to turn this into $100,000 a staggering 1000 % in just 50 trades! Obviously this is simplified as small losses must also be taken into account – but you get the point! However, the key point is that you do not need to make huge gains per trade to make money trading – just to minimize losses and win more than you lose! Focus on compounding your gains and minimizing your mistakes! Be a sniper in the market and the mathematics are in your favor !
The graph illustrates why some daytraders are able to take very modest sized trading accounts and increase their account size by 1000 % in a few months. Of course it is a high risk strategy because if you are making losing trades, you can lose the entire account extremely quickly and effectively compound your losses. The principle is rather simple but in practise it can be much harder to have the extreme levels of discipline that are required to take the 5% gains and cut any losses extremely quickly.
See where I learned to trades stocks HERE this guy knows how to compound gains and cut losses quickly in order to maximize the compounding effect! So when you invest or trade always remember that compounding your gains will massively amplify the growth of your trading account.