Compound interest in stock investment has great significance in money management.
Let’s consider the relationship between compound interest and theory (logic) in stock system trading.
First, a simple compound interest calculation for turning 3 million yen into 100 million yen by investing at a daily interest rate of 1% (monthly interest rate of 20%) is as follows.
| Number of days | Investment capital | Daily interest rate (1%) | total |
|---|---|---|---|
| 1 | 3,000,000- | 30,000- | 3,030,000- |
| 2 | 3,030,000- | 30,300- | 3,060,300- |
| 3 | 3,060,300- | 30,909- | 3,090,903- |
| … | … | … | … |
| 352 | 98,610,566- | 986,106- | 99,596,672- |
| 353 | 99,596,672- | 995,967- | 100,592,639- |
A simple calculation would give you 100 million yen after 353 business days.
*If you calculate based on a 5-day week, it will take about 1 year and 5 months.
Even if the monthly interest rate is the same 20%, if the theory (logic) breaks it down to 19 days of +2% and 1 day of -18%, it will only amount to about 80 million yen after 353 days.
If there are more negatives, such as 19 days of -1% and 1 day of +39%, it will only amount to about 27 million yen after 353 days.
This can be easily calculated in Excel, so it is helpful to actually calculate “compound interest.”
If you are assuming that you will be using “compound interest,” then a theory (logic) that allows you to win on average will be more efficient than a theory (logic) that prioritizes the win rate and postpones big losses.
Drawdown
An important thing when managing funds is that you must also calculate drawdown.
If the logic used in the previous “compound interest” calculation shows a -18% daily drawdown, you don’t know when a drawdown will occur, so you need to always adjust the number of shares so that you have a 20% surplus.
If you are using logic for position control (flat-trading or pyramiding), you need to calculate this in advance, otherwise you will run out of funds and will not make the profits expected in theory.
Small fund welfare efficiency
Since I only have a small amount of capital this time, I have developed a logic for day trading, so I will not carry over my open positions for days or weeks.
I feel that there is less risk by not carrying over, and since I want to sell, I will use margin trading, which is about three times more efficient.
If I were to do system trading with a capital of 1 million yen on a stock with a price of 5,000 yen, even if I calculate it as three times the margin trading, the maximum number of positions per position would be 600.
It is not possible to have 606 the next day, so if the logic is such that I can expect a profit of 1% per day, I can increase it to 700 after an increase of about 170,000 yen (500,000 yen divided by 3).
If the investment capital is 1 million yen, it can be calculated as “compound interest” after 17 days, and if the investment capital is about 20 million yen, 1% compound interest per day can be calculated.
In short, the “simple compound interest calculation when turning 3 million yen into 100 million yen” in the first table may be possible for a stock with a share price of around 700 yen, but in reality, it would be difficult to use system trading for stocks with a share price of 1,000 yen or less, due to the high spread costs of margin trading.
Of course, the fact that it is difficult with system trading means that discretionary day trading is even more difficult.
