How compound interest works in trading

What is compound interest?

Compound interest is the principle of earning interest on your interest. Instead of withdrawing your gains each month, you reinvest them. Your capital grows, and next month's gains are calculated on this higher capital.

A concrete example

Let's take €1,000 invested with a 20% monthly return: - Month 1: €1,000 × 1.20 = €1,200 - Month 3: €1,728 - Month 6: €2,986 - Month 12: €8,916

Without compound interest (withdrawing gains each month), you'd have €1,000 + €2,400 = €3,400. With compound interest: €8,916. The difference is massive.

Why it's the power of algo trading

Algorithmic trading is ideal for compound interest because the algorithm automatically reinvests your gains. No need to intervene, no temptation to withdraw too early.

The importance of not withdrawing too early

Patience is key. The first months seem modest, but it's from the 6th month that the exponential curve really starts to accelerate. Each additional month of patience multiplies your results.