The Power of Compounding Interest: Risks and Rewards

by Avramis Despotis     Jul 16, 2019

If you've spent any time researching savings accounts, growing wealth over time, or the basic principles of getting ready for retirement, you're probably already familiar with the concept of compounding interest. In fact, some of the most common savings advice from the top financial gurus is to "save early and save often," allowing interest to compound over time and watch your savings grow. Today, we're going to talk about how you can use compounding interest to your advantage when trading on the Forex trading arena, as well as the risks involved with choosing this as your trading strategy.

Compounding interest is seen as a "secret strategy" to wealth, but gaining compounding interest is also a very high-risk strategy; it is usually recommended to younger investors because the risk for loss is so much higher than other trading strategies. Before you even consider reinvesting your interest into your Forex trading profile, know that the principles of compounding interest make it inherently a long-term strategy. If you are depending upon the profits from your Forex trading venture to fund your retirement, your child's college education, or any other long-term and important goal, there are lower-risk trading strategies that might be better for you.

That being said, compounding your profits has the potential to make you a millionaire if done correctly and undertaken at the right time. Forex trading veterans recommend that you begin by studying up on the "rule of 72," which can be a great way to start compounding your Forex profits if you decide that this trading method is right for you and that you're willing to take the risks.

The rule of 72 is useful for determining the amount of time that it will take for your money to double given a constant interest rate. You can use the rule of 72 by simply dividing your investment interest percentage rate by 72. For example, if the funds you were holding were given a 6% interest rate for an unspecified period of time, it would take you 12 years to double your initial investment. Using the rule of 72, you can accurately estimate how much money you will make, which you can then reinvent into your Forex trading account. By using proper money management techniques, you can hold your money into a high-interest account, and reinvest the interest that you make back into the currency pair of your choice. If done correctly, this Forex trading strategy has the potential to double or even triple your money exponentially.

While investing compounding interest is one of the most potentially profitable methods of Forex trading, you must remember that it is also one of the riskiest. You should assume that there is a possibility that you could lose all of the money that you invest, because this always is a possibility, no matter how hard you safeguard yourself. However, if you are a younger investor who is ready to take a risk, there is serious money that can be made in investing compounded interest into your Forex trading account.

The best way to protect yourself against a Forex trading flub? Arming yourself with the education that you need. Finding the right beginners education hub, like those available from Trading 101, is the smartest move that a trader can make to go forward and trade profitably.

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