Compound interest is the concept of earning returns on both your initial capital and accumulated profits. In trading, this means reinvesting profits to grow your account exponentially.

A seemingly modest 5% monthly return, compounded over 12 months, turns $10,000 into approximately $17,959 — an 80% annual return. This demonstrates the remarkable power of consistency.

The key to benefiting from compound growth is consistency and risk management. A single large loss can wipe out months of steady gains, which is why position sizing is critical.

Many successful traders aim for consistent monthly returns of 3-10% rather than seeking large individual wins. The mathematics of compounding reward consistency over volatility.

When projecting compound growth, be realistic about drawdowns. No trader achieves positive returns every single month, so factor in occasional losing periods when planning.