“Nothing is unknown, just temporarily not understood.”
Captain James T. Kirk
There is only one way to profit in the market. You must apply a systematic approach over time, compounding interest from your investment as you go. Don’t be so naive to expect you will get rich overnight. Remind yourself that patience is a virtue when it comes to trend following. You must have the discipline to work within the structure of your system. For example, if you can manage to make 50% a year in your trading, you can grow an initial $20,000 account to over $616,000 in just seven years. Trust that time and the power of compounding will take over if you stick with your system. You think 50% is too unrealistic for you? Do the math again using 25% as the compound interest formula. In other words, compounding is essential.
Hypothetical investment of $20,000 (annual rates of return compounded)
30% | 40% | 50% | |
Year 1
|
$26,897 | $29,642 | $32,641 |
Year 2
|
$36,174 | $43,933 | $53,274 |
Year 3
|
$48,650 | $65,115 | $86,949 |
Year 4
|
$65,429 | $96,509 | $141,909 |
Year 5
|
$87,995 | $143,039 | $231,609 |
Year 6
|
$118,344 | $212,002 | $378,008 |
Year 7
|
$159,160 | $314,214 | $616,944 |
An Extract from the Trend Commandments Regarding Compounding
The big money of letting profits run: Trend following at its best aims to compound absolute returns. It doesn’t shoot for average.
The goal is to make the knock your socks off returns, not passbook savings interest. Trend following also has the unique ability to lie and wait for targets of opportunity. That means making a killing on unpredictable surprises.
You may also like to read my thoughts on the Volatility and Risks of Investing and on Investing Expectations.
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