The Concept of Compounding
The idea behind compounding your profits as you make them can be extremely effective if your trading strategy is sound enough to produce winning streaks. As you make profits you can help combat the bad risk:reward of Binary Options by letting some of them ride and banking the rest. There is no limit as to how far you can take compounding but in order to keep things realistic you should not expect winning streaks to go on too long before encountering a loss. No matter how good your strategy you will have losses because that is just part of trading, however, if your strategy is good and you are good at executing it, or you have a good signal provider, you can make the most of the winning streaks.
Let’s take a look at how to compound your profits based on a 6 trade winning streak expectation and how it can effect your profits. This number 6 in the sequence is where it really starts to make a difference, expecting to win more than 6 in a row starts to become less and less likely, and even if you take this to 5 in a row and stop there, it still provides a good bonus. This time we will use an example of where you are getting 80% returns from your broker and using a $10 starting stake.
| Trade # | Stake Amount | Trade Profit | Running Profit | Secured Profit |
|---|---|---|---|---|
| 1 | $10 | $8 | $8 | $0 |
| 2 | $10 | $8 | $16 | $1 |
| 3 | $15 | $12 | $28 | $3 |
| 4 | $25 | $20 | $48 | $8 |
| 5 | $40 | $32 | $80 | $30 |
| 6 | $50 | $40 | $120 | $120 |
A rule of compounding is that once your target wins in a row is met you either stop or return back to trade #1. If at any point down your sequence you get a loss, you return back to trade #1. The easiest way to understand the difference that compounding introduces is to just look at the numbers side by side. We will use 80% returns again as our base and assume a $10 stake for basic trading. A $10 compounded start stake is also used again to replicate the compounding table results above.
| Trade # | Basic Stakes Profit | Compounded Stakes Profit |
|---|---|---|
| 1 | $8 | $8 |
| 2 | $16 | $16 |
| 3 | $24 | $28 |
| 4 | $32 | $48 |
| 5 | $40 | $80 |
| 6 | $48 | $120 |
Some days your Binary Options trading strategy may not even have 6 trades, this really depends on your strategy, and there is never any need to force a trade. This is how you will get the most losses, when you force it. The point is that even if you make it to 4 wins in a row and need to stop for the day compounding is still more profitable than basic stakes. If you make it to 5 or 6 where the gap expands on an exponential curve, the results start to make a big difference.
The Compounding Profits Worksheet
Here is a Compounding Profits Worksheet for you to use that runs to a very optimistic 8 streak. It is an Excel file and all you have to do is enter values in to the top 3 black cells, the rest will be done for you. (click the image to download)
So is Compounding for You?
The answer to this question requires you to have a demo trading history to analyse at the least, having a real money trading history to analyse would be best though. What are your longest winning streaks? What are your most common length winning streaks? and how often do you get them? The answers to all of those questions will help you decide. You really need to be getting 5 or 6 trade winning streaks to make the most out of compounding but you can still make a difference with 4. You can scale the above numbers as you wish according to your risk appetite and account size, a $10 starting stake is just realistic for many.
If you set your maximum loss each day to $20 and stuck to it, then went for 6 trade win streaks, the plan each day would be to gain $120 or lose $20, or finish the day with small profits if you didn’t lose $20 or get the streak. Whichever the case it is worth noting that 1 winning day would eliminate 6 losing days. That is something to think about!
