One month is straightforward
If $10,000 of capital earns a net 20% during a month, the gain is $2,000 and the ending capital is $12,000. That describes that one period only. It says nothing by itself about the following month.
Repeated returns create compounding
If the same 20% net result were repeated and every gain were reinvested, the next month's 20% would apply to $12,000 rather than the original $10,000. This is why repeated percentage returns create an accelerating curve.
| Illustrative period | Capital if +20% repeated |
|---|---|
| Start | $10,000 |
| 3 months | $17,280 |
| 6 months | $29,860 |
| 12 months | $89,161 |
| 17 months | $221,861 |
| 24 months | $794,968 |
Those figures are mathematics, not a forecast. They assume a positive 20% result every month with full reinvestment and no interruption.
Why the projection becomes extreme
At 20% per month, capital is multiplied by 1.20 every period. Over many periods the effect is exponential rather than linear. That makes compounding useful for understanding the power of repeated returns — and dangerous when a hypothetical projection is presented as if it were likely.
Real trading does not compound smoothly
Live strategies can have weaker months, losing months, drawdowns, changes in execution and changes in market conditions. A historical average can describe an observed period, but it cannot establish that the same average will continue.
Net versus underlying strategy return
A user's return can also differ from the underlying strategy's percentage because of fees, capital structures, leverage or amplification. Always establish which capital base a percentage refers to and whether the number is before or after fees.
Use compounding as a scenario
The useful question is not “will this happen?” but “what would the mathematics look like if this net result repeated?” That distinction lets a calculator illustrate the effect without turning a historical number into a promise.
Model your own return and compounding scenario →