Fixed, Full, and Partial Compounding in Trading Accounts
Summary
This document explains how capital assumptions change trading account curves and position sizing. Fixed capital keeps the account base constant, so profits and losses are calculated from the same amount. Full compounding updates the capital base after each return, causing later gains and losses to grow with the account. Half compounding illustrates a partial adjustment in which the capital base changes more gradually. Worked tables show how the approaches produce different profit and drawdown paths from the same sequence of percentage returns.
The discussion argues that constant capital is often useful for comparing a strategy’s performance over time, while variable capital can illustrate reinvestment or test a capital-correction method. It also points toward applying these methods in pysystemtrade, including a more position-aware approach for live trading. The excerpt does not explain those implementations in detail or provide a complete comparison of their effects on real portfolios. Its examples are illustrative accounting calculations, not evidence that any particular compounding rule improves trading results.
Key ideas
- Fixed capital calculates each return against an unchanged account base.
- Full compounding adjusts the capital base after each profit or loss.
- Partial compounding lets the account base adjust by less than the full change.
- Capital assumptions alter the scale of later profits, losses, and drawdowns.
- Constant capital can help compare strategy performance, while variable capital can test reinvestment assumptions.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.