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What should I do with my profits? – This is a question I have come across pretty often and I think it is an important aspect of trading that I’d like to discuss.
There are two ways to go about it: Compound your profits or withdraw it.
Compound your profits
According to Albert Einstein,
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
Compounding your profits is one of the best ways in which a trader can grow his or her account at an accelerated rate.
However, the true effect of compounding your money only becomes meaningful when you have a large amount of capital.
For example, a $1,000,000 account compounded at a monthly growth of 5% per month will yield $1,710,339.36 at the end of 12 months – a growth of $710,339.36.
Compare that with a $1000 account compounded with the same parameters, yielding $1,710.34 – a growth of $710.34.
You can take advantage of this useful tool to project your compounding: http://www.forex21.com/forex-compounding-calculator/
This is why some of the small-capital traders don’t see the need to compound their profits because it would take too long to grow it to an ideal size and hence, they turn to option two, withdrawing their profits on a regular basis.
Some traders, because of the above reasons, withdraw their profits to use as extra pocket money – perhaps to buy something material to reward themselves with, or to just treat their family and friends a nice dinner with.
It is healthy to withdraw your profits every once in awhile and spend them on something meaningful – like a meal for your family or a gift for loved ones or yourself.
It is a visual manifestation of your trading performance, which reminds yourself that your profits are real.
For example, you have made more than enough to get the computer you always wanted. From now onwards, whenever you use the computer, you will be reminded of how you traded your way with discipline to earn it. The feeling is definitely indescribable.
Don’t underestimate this experience as it is one of the biggest form of motivation for you to work harder in your trading endeavors and scale greater heights.
After all, we should all reward ourselves once in a while for a good job done.
The only drawback to this is that you will not be able to compound your profits and grow your account meaningfully. So it will be a growth-withdraw-starting balance cycle all the way.
In the end, there is nothing wrong with choosing one over the other. It comes down to the individual’s objective and what the money deposited in the trading account means to the trader.