Traders call this series of consecutive losses – the drawdown.
Many traders just don’t think about what they’ll need to recover during a losing period.
Today, I’m going to equip you with a formula you can use to see what is required to recover after a portfolio loss and how you can protect yourself from portfolio destruction.
Let’s get to it…
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Watch out for the deadly drawdown
Here’s an example with two traders, John and Georgia.
After trading three months, they both undergo a drawdown.
Georgia is down 5% on her portfolio and John is down 60% on his trading account.
They now want to calculate what they need to recover to get their portfolios back in the green.
The recovery formula and how to calculate it
Here’s the formula:
Required percentage = [1 ÷ (1 – Percentage loss)] – 1
Now we just plug in the percentages for both Georgia and John.
What Georgia’s recovery percentage is after a 5% drawdown
Required percentage = [1 ÷ (1 – 0.5)] – 1
It may seem obvious that with Georgia being down 5% on portfolio, she’ll need a return of 5.2% to get her portfolio back in the green.
However, when the drawdown increases substantially, it starts to look quite scary.
Here’s what John needs to recover after his 60% drawdown.
Required percentage = [1 ÷ (1 – 0.6)] – 1
With John being down 60%, he’ll need to recover a staggering 150% on his portfolio before he gets his trading account back in the green.
How to never lose more than 20% of your portfolio
You can clearly see that as you take more losses, and as your portfolio drops further, you’ll need to recover a larger portion of your portfolio to be back in the positive.
If your portfolio ever drops more than 20% at a time, you’ll need to know what to do to get it back in the green.
Almost every successful trader I know, has careful measures to ensure they never blow more than 20% of their portfolio.
This follows the same principle of the science of successful trading – to preserve, protect and grow your portfolio. This will prevent you suffering those bigger kinds of drawdowns.
If you’d like to know the most essential rules and tips to never lose more than 20% of your portfolio, you can find it all in my free trading report when you join Red Hot Storm Trader.
“Wisdom yields Wealth”
P.S: Without these essential money management rules, even if you have a profitable trading strategy, you might as well go to the casino and blow your money.
I can only urge you to read the Secrets of Successful Trading free report when you join my exclusive group by going here.