What is Compounding?
Reinvesting profits so future returns are calculated on an ever-growing base — generating exponential growth over time.
Compounding is the process of reinvesting your earnings so that each period's return is calculated on a larger base. It's often called the "eighth wonder of the world" because even small consistent gains compound into significant growth.
The formula:
Final Balance = Starting Balance × (1 + r)^n
Where r = return per period, n = number of periods.
Example — 1% daily gain, 252 trading days:
$10,000 × (1.01)^252 = **$122,299**
That's 12× on 1% per day. But 1% per day consistently is extremely rare — this example illustrates the math, not a realistic expectation.
Realistic compounding — 3% per month:
$10,000 × (1.03)^12 = **$13,439** (+34.4% in a year)
Drawdown impact on compounding:
A 20% drawdown requires a 25% gain to recover. Losses compound against you too:
$10,000 → −20% → $8,000 → needs +25% just to get back to start
This is why drawdown control matters more than return maximization — protecting capital preserves your compounding base.