How to Trade the Financial Markets using the ‘Eighth Wonder of the World’
Albert Einstein once proclaimed “Compound Interest is the Eighth Wonder of the World”
If you fully comprehend this statement you are on the right path to financial alchemy.
Can you really grow a small acorn into a huge oak tree? With time absolutely!
There are 4 key components of compound interest that will make your money take off like a jet plane.
1) First, the obvious one. You need to have some capital to start with and/or a fixed monthly amount. Even if you only have £2000 or £50 per month to start with, this will trigger you into a habit of compounding up your money.
2) The regularity of the investment return must be consistently added to the accumulating sum of money each month with no gap. This is the power of the snowball effect as you build momentum, so 5% per month, compounding plus 5% per month compounding and so on…..
Paying a regular fixed amount each month into your trading or investment account will also add to the snowball effect.
3) TIME -You need to have enough time for the sum to grow – 10 years is good but 20 years is even better if you are saving regularly into a pension or other savings vehicles!!
It is only when you add the power of leverage to compound interest through trading the financial markets that you can reduce the number of years considerably. Put the number you want to achieve and the expected investment return into our Financial Traders Café compound interest calculator to see how many years it will take to achieve.
4) ROI –The return on your investment is the magic ingredient that will accelerate the speed of how fast your money will grow. Decide on an acceptable return to begin with and then increase this percentage. You can do this if you are trading and investing with your own money as you will determine the rate of growth through your own skill and discipline. The fixed rate of investment return needs to be the same or higher than the month before.
Using the Financial Traders Café compound interest calculator you will know how much money you need to make by the end of the week or month to keep you on track with your financial targets. We have a step by step process of how to do this. We just need your name and email here if you would like to receive this.
As an example if your trading capital is £5320 at the start of this week (the balance brought forward from the end of the previous week) and your target is 5% per week compounded you need to make at least £266 by Friday so the balance will be £5586 carried forward to the following week.
If you aim to achieve 10% per week you need to make £532 by Friday so that your new balance carried forward to the following week is £5852.
Why is this so important?
- You are training your brain to get into a habit of hitting a weekly This needs to get into your subconscious so you are very clear what needs to be achieved. This is the power of intention. The simple action of breaking down your long-term target into weekly and then daily goals should not be under-estimated. Remember where your focus goes, energy flows. If you are haphazard shooting for anything or have no idea where you are going, guess where you will end up? Yep, nowhere!
- By setting a goal of 10% a week you may not always achieve this every time but aiming much higher than what you have limited your mind to believe is possible. This means that even a 5% return that week will still help snowball your trading account quickly so you can increase the trade sizes.
- This will discipline you to stick to the risk management principles. My own rule is never to risk more than 2% of my accumulating trading account.
- By seeing the bigger numbers ahead on the compound interest calculator you will see that your goal is within your sights which will keep you focused and avoid doing something silly to send you slithering back down the snake (remember snakes and ladders!). Think of someone looking at the mountain peak before they start there ascent. They are not going to get there in one great step are they?
‘By the inch it’s a synch and by the yard it’s hard’.
Many traders want big profits immediately when they first start trading. They find out very quickly that you might get lucky on a few big trades but it’s only a matter of time before you get caught out and blow up your trading account.
By taking time and risking no more than 2% of your trading account on any one trade and compounding your account up over a few years you will be amazed how quickly the account grows.
The magic is the regularity of targeting the same weekly rate of return and increasing your trade sizes as your account grows.
Remember “Small hinges swing big doors”
I think traders are discouraged when they start trading only £1 per point thinking it will take forever to build up a big chunk of money. Check out the Financial Traders Café compound interest calculator and you will see this is not the case.
If you made just 5% per week on a £5000 trading account in just 12 weeks this will be £8,979 and in 24 weeks the account will be £16,125. You are still only trading 2% of your trading account which is now much bigger so you can now increase the leverage/trade size. This is the massive power of using compounding and leverage together.
So you are targeting the same amount of pips/points to catch in your net each day and week. If you are hitting your weekly target at just £1 per point you should be able to repeat the same process when you increase the leverage to say £4.26 per point on a bigger trading account, whilst sticking to the maximum of 2% risk. This all assumes you repeat the same trades using the right strategies, risk/reward ratios and manage the trades correctly. This is something I teach at my seminars and workshops.
Never get emotional about the trade size
When increasing your trade sizes you have to completely detach your emotions from the amount. If you are too attached to larger trade sizes and start worrying about the losses this will sabotage your results.
Managing your thoughts and emotions is massively important and something I dive into deeply when talking about the psychology of trading and investing in my events and one to one coaching sessions.
Wealth Rule 72
Divide any number into 72 and you will get an idea how many years it will take for your money to double.
For example, if you want to double your money in 3 years you need an investment return of 24% per year, compounded. A good question to ask is “What can I invest in to give me a 24% a year return without being reckless with my capital?”
If you get just 2% a year interest on your money it will take 36 years to double your money! Typically this could happen if you just left your money to compound in a bank account. The risk is your money will be eroded by inflation over the next 36 years! You just need to think of how much you paid for something 10 years ago compared with today to appreciate how much the cost of goods and everyday bills have risen by.
The general expectation is that property doubles every 7 years so this means it needs to grow by approximately 10% per year. Obviously, this depends on the location where you buy but you get the idea!
Financial Traders Café Compound Interest Calculator
This calculator is my gift to you – it is simple but a very powerful tool to keep you on track. It will also keep you disciplined and focused on your target. This is especially important if you are just starting out as a financial trader and investor.
If you would like us to send you this calculator we just need your name and email address.
Never beat yourself up if you have a bad week. It’s not just money that compounds but also your negative thoughts and emotions. So discard the last few trading losses from your memory. Revenge trading and trying to recover big losses, getting angry and frustrated and blaming everyone will sabotage your ability to trade successfully. Keep the losses small and stick to the rules and you’ll be fine.
If you are in a negative state, avoid trading or investing, otherwise, you will make bad decisions resulting in your losses compounding. We have to enter a trade always with the expectation of a profitable outcome.
Financial trading and investing is a process which should be enjoyed if you follow the rules. It should be fun and stress-free. You will learn so much about yourself and how you react to different situations. People I have taught to trade have said it has helped them immeasurably in their day to day business.
So was Albert Einstein right that compound interest is one of the greatest powers in the world? Give it a go and find out for yourself!!!
To your success, Adam