Letting risk per trade grow with equity, which turns a linear edge into geometric growth and a linear edge into geometric decay.
Compounding size is the whole reason percentage rules exist. Risking 1% of a growing account means each winning trade slightly enlarges the next bet, so returns multiply rather than add.
The numbers are stark. A system averaging +0.2R per trade at a flat 1 contract on a $30,000 account earns a fixed dollar amount per trade; the same system with 1% compounding earns a fixed percentage, and 100 trades at an average +0.2% compounds to about +22%. Over a thousand trades the gap is enormous.
The symmetry is the part people skip. Compounding downward means a losing run cuts size and slows recovery, and volatility-drag means the geometric result is always below the arithmetic average. Compounding rewards a genuine edge and accelerates the destruction of a fake one.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Compounding against a flat return. Two accounts start at $10,000 and earn 10% a year for fifteen years. Leaving the gains in means each year earns on a larger balance, so the curve bends away from the straight line and ends $16,772 higher.Working out a position size. Three numbers decide how big a trade is: the account, the share of it put at risk, and the distance from entry to stop. One percent of $25,000 is a $250 budget, and a $0.50 stop divides into that 500 times.
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