Compounding

Growth applied to a balance that already includes previous growth.

Also called: compound growth · compound interest

In plain language

Compounding means each period’s return is calculated on the new, larger balance. Gains generate gains, and the curve bends upward over time.

It works in reverse too. Losses compound against a shrinking base, which is precisely why drawdown recovery is so asymmetric.

In percentage-based risk models compounding is automatic: risking 1% of current equity means your dollar risk grows with the account and shrinks during drawdowns.

The formula

Compound Growth

Final = Starting × (1 + Rate)^Periods

Rate: Return per period, as a decimal
Periods: Number of compounding periods

Worked through

Two years at 2% a month, with and without one bad month

24 months at +2%: $10,000 → $16,084
23 at +2%, one at −30%: $10,000 → $11,038
Cost of that single month: $5,046
Months of gains erased: 19

Two percent a month is unremarkable — it is a good but entirely ordinary result. Compounded across twenty-four of them it turns $10,000 into just over $16,000, and almost all of that growth arrives in the final third, because each month builds on a larger base than the last.

Replace any one of those months with a 30% loss and the ending balance falls to about $11,038. Where in the sequence it lands barely matters; what matters is that every month afterwards compounds from a smaller base. That single month cost $5,046, and closing the gap at 2% a month takes another nineteen.

That asymmetry is the argument for boring risk, and it does not rely on being timid. The compounding curve is built on the base, so protecting the base is worth more than any individual gain added to it. One avoided disaster outweighs a long run of slightly better entries.

It is also why "I need a big win to catch up" has the mathematics backwards. Big wins require big risk, big risk produces the months that reset the base, and the base is the only thing doing the compounding.

Change the numbers

This is the concept as a working tool. Edit any field and watch what moves — that relationship is the thing worth remembering.

Try it yourself

Starting Balance

Return Per Period

Number Of Periods

Final Balance: $16,084.37
Total Growth: $6,084.37
Multiple: 1.61×

Compounding rewards consistency far more than size. It also runs in reverse — a single large loss removes many periods of growth from the base the whole curve is built on.

See what a drawdown does to this curve