How it works
Compounding is the process of earning returns on previous returns. The calculator starts with your opening balance, applies the chosen rate for one period, adds any contribution, and repeats for the number of periods you select. It then shows the ending balance, total contributions and total growth.
Every result is hypothetical. Real trading accounts do not grow at a constant rate, and losing periods are a normal part of any strategy.
Formula
Balance(n) = Balance(n − 1) × (1 + r) + contribution
Where:
- r is the return per period as a decimal (2% = 0.02)
- contribution is the amount added at the end of each period (it can be zero)
With no contributions, this simplifies to:
Ending balance = starting balance × (1 + r) ^ number of periods
Worked examples
These examples use an illustrative fixed return to show the arithmetic only.
Example 1: No contributions
- Starting balance: $10,000
- Return: 2% per month
- Periods: 12 months
Ending balance = 10,000 × 1.02 ^ 12 = 10,000 × 1.26824 = $12,682.42
Total growth = $2,682.42, about 26.8%, compared with 24% if the 2% had been simple (non-compounded) interest.
Example 2: With a monthly contribution
Same inputs, plus $200 added at the end of each month.
| Month | Calculation | Balance |
|---|---|---|
| 1 | 10,000 × 1.02 + 200 | $10,400.00 |
| 2 | 10,400 × 1.02 + 200 | $10,808.00 |
| 3 | 10,808 × 1.02 + 200 | $11,224.16 |
After 12 months the balance would be $15,364.84, of which $2,400 is contributions.
Example 3: Why losses matter
A 10% loss followed by a 10% gain does not get you back to where you started:
10,000 × 0.90 × 1.10 = $9,900
After a 50% loss, you would need a 100% gain to recover. This asymmetry is why many traders focus on limiting drawdown.
Tips
- Test pessimistic scenarios. Try lower or negative rates, not just optimistic ones.
- Think in ranges, not single numbers. A strategy's returns vary; a single rate hides that.
- Watch the risk behind the rate. Higher returns usually require more risk, which also means larger potential losses. See Basic risk management.
- Compare with real results. Your Trading Journal shows what has actually happened, which is more informative than any projection.
- Practice first. The Trading Simulator lets you try ideas with a virtual balance.
Risk note
Compounded projections can look impressive on paper, but they assume a steady return that no trading approach can promise. Trading involves substantial risk, and you may lose some or all of your capital. Results from this calculator are hypothetical, educational illustrations and not a forecast or advice.
Frequently asked questions
What does compounding mean?
Compounding means each period's return is calculated on the previous balance, including earlier gains. Over many periods, growth builds on growth.
Can I expect a steady monthly return from trading?
No. Trading returns vary from period to period and can be negative. A fixed rate is a simplifying assumption used to illustrate the maths, not a realistic forecast.
When are contributions added?
In this calculator, the contribution is added at the end of each period, after that period's return has been applied.
Can I model losses?
Yes. Enter a negative return to see how a balance shrinks. You will notice that recovering from a loss requires a larger percentage gain than the loss itself.
Are taxes and fees included?
No. Taxes, trading costs and withdrawals are not modeled, so real results would differ.
Guide last reviewed .