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Are you wondering how much you could earn from your forex trading?

A simple way to calculate your potential winnings is with a forex compounding calculator. If using a calculator sounds intimidating and makes you think of high school math class, relax. It’s much simpler than it sounds.  

We’ll walk you through the process step-by-step. In just a few minutes, you’ll feel confident enough to use the calculator to help you plot your financial goals

Where Can You Find a Forex Compound Calculator? 

Fortunately, things have changed since the days when back-to-school shopping meant racing to the office supply store to grab a Texas Instruments calculator before they sold out.

Today, free calculators (including forex compound calculators) are available to anyone with an internet connection. 

Why Is It Called a Compound Calculator? 

The name “compound calculator” simply designates that the calculator helps you to see the effect that compound interest will have on your balance.

But before we can appreciate how compounding works with forex, we need to make sure that we grasp the basics of compound interest

What Is Compound Interest? 

Compound interest is best understood when contrasted with simple interest. Simple interest on an account is the amount of money paid based upon only the principal.  

For instance, if your account contained $5,000 and earned 1% interest annually, the new account balance after a year would be $5,050. The 1% interest earned you an additional $50. 

In the second year, your account would have $5,100. You’ve gained another 1% of the principal, $5,000. 

Now let’s compare that account to one with compound interest. We’ll use the same balance of $5,000. If left in a bank that paid 1% annual percentage rate, after a year, the account would contain the same $5,050 as the account in the first example. 

But then in year two, instead of a balance of $5,100, the account would have $5,100.50. That’s right, you’d have an additional 50 cents.

Not very exciting, we admit. After all, bank interest rates are historically low. You'll have trouble finding one that offers as much as 1%. But the example serves to illustrate the basics of compound interest. 

Now things get more interesting as we’ll see how this same process can deliver far greater returns in forex. 

Why Compound Interest in Forex Is Better Than the Bank 

You determine the amount of compound interest that you receive in forex. This differs from the bank where it’s the bank that sets its interest rate. 

How do you control your interest rate? You can choose investment positions that are anywhere on the risk scale. The greater the risk, the larger your return on investment. In essence, you’re deciding how much you want to be paid on your capital investment. That’s like choosing your own interest rate. 

You could play it safe like your neighborhood bank, and settle for a return of 1% or less. On the other hand, you could aim much higher say, a 3, 5, or even 10% gain. 

To better understand how this process works, let’s now take a look at a forex compound calculator. 

Using a Forex Compound Calculator 

Many forex compound calculators use three pieces of information. The better ones allow you to enter four items, the additional item being monthly deposits. 

Here are the four categories of information: 

  • Starting balance 
  • Monthly deposits 
  • Monthly rate of return (interest rate)  
  • Number of months 

Let’s begin by comparing a forex account against the bank account. To be fair, we’ll use the same balance ($5,000) and the number of months (12). We’ll also not make any monthly deposits during those 12 months since we didn’t do so with the bank account. 

The difference comes from the compound interest. First of all, forex traders consider a 1% return, like the one we got from our bank, nothing to brag about. But, let’s use it anyway. After a year, your balance would be $5,634.50. 

That’s quite a jump from the $5,050 that you would have gotten from a bank. Why would the return from the forex account be so much larger than that from the bank if they’re using the same interest rate? 

The key is in how often the interest is compounded. The bank gave you 1% interest over a full year. The forex account behaves differently. The 1% is compounded monthly. That means that the full 1% is added to your balance each month.  

Now, keep in mind that you’re in control of your forex account’s return rate. If you’re inactive for a month, no interest is automatically applied to your account. You have to earn your interest rate through skillful trading. 

After the first month, your forex account would contain $5,050—that’s the same amount that would take your bank account an entire year to earn.

In the second month, 1% is once again applied to the forex balance—but the updated balance of $5,050. The new total would then be $5,100.50, the amount that your bank account had after a full two years. 

Why You Want to Use One of the Better Forex Compound Calculators 

The better forex compounding calculators also allow you to enter the amount of money that you will deposit into your account each month. These calculators will give you a more accurate idea of how much you must earn each month to reach your financial goals. 

Let’s now go back to the $5,000 forex account, but this time we’ll decide to deposit an additional $400 each month. What happens to the balance? After one year, the account balance would stand at $10,707.13.

But suppose that you need more money in a year to hit your investment target. A forex compounding calculator allows you to adjust your data entry until you see the potential balance you want.

For example, let’s change the return rate or interest rate and see how your balance is affected.  

Forex Calculation 1 

Starting balance: $5000 

Monthly deposits: $400 

Monthly rate of return (interest rate): 3% 

Number of months: 12 

Ending balance: $12,805.62 

Forex Calculation 2 

Starting balance: $5000 

Monthly deposits: $400 

Monthly rate of return (interest rate): 5% 

Number of months: 12 

Ending balance: $15,346.13 

Forex Calculation 3 

Starting balance: $5000 

Monthly deposits: $400 

Monthly rate of return (interest rate): 7% 

Number of months: 12 

Ending balance: $18,416.34 

Never Stop Learning

If you’re beginning to experiment with forex compound calculators, you’re in for some exciting times in the market.

You can easily grow your trading knowledge by regularly reading the helpful and instructional entries on our blog. Keep browsing for more great reads on our site!

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