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One Formula to calculate what you need to recover after a bunch of losing trades

by , 01 October 2020

Q. “Hi Timon, it's been a tough two months trading, with this sideways market.

Right now, I'm worried because I'm down 15% of my portfolio.

It's entirely my fault as I let my trades run down without a stop loss.

Do you possibly have a calculation that I can use to see how much I need to recover to get my portfolio back to what it was?”

A. Hi Andrew, yes it is most definitely a challenging market environment at the moment.

I am also currently in a drawdown phase, and so you’re not alone.

NOTE: Drawdown is a drop in portfolio value after one or a series of losses.

However, I’m down 5% of my portfolio which is perfectly normal for any trading strategy.

Right now, it’s very important to keep following your strict money management rules and risk less of your portfolio per trade, during these uncertain times.

To go back to your question. I believe what you’re looking for is what I call a “Drawdown Calculator”.

Here’s the drawdown calculation you can use:

Required gain = [1 ÷ (1 – Percentage loss)] -1

Let’s put in both of our drawdown percentages to see what we need to recover to get our portfolios back to what they were…

Andrew’s drawdown = 15%

Required Gain = [1 ÷ (1 – Percentage loss)] – 1
= [1 ÷ (1 – 0.15)] – 1
= 17.64%

Timon’s drawdown = 5%

Required Gain = [1 ÷ (1 – Percentage loss)] – 1
= [1 ÷ (1 – 0.05)] – 1
= 5.26%

This means, Andrew will need to make a 17.64% gain of his portfolio to return his portfolio before the drawdown.

While I’ll need to make a 5.26% gain to restore my original portfolio value.

There are two things I do to protect myself during a drawdown.

First, I lower my risk from 2% down to 1.5% per trade, when the market environment turns ugly.

Second, if my portfolio ever drops below 20% then I stop real trading and I wait for the market to rectify itself…

But I’ll need to write an entire new article around this… Keep reading Trading Tips.
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Q. “Can someone please tell me the difference between the monthly newsletters namely, The South African Investor and Real Wealth. I am a 47 year old male who is trying to allocate my portfolios into three main compartments. So far I have Red Hot Storm Trader as my service to help with my short-term trading. And now I want to see where both SAI and Real Wealth fall in.”

A. First of all, congratulations on diversifying your portfolio instead of just depending on one income source.

Joshua Benton is the main man who manages the newsletters, and does a fantastic job with both.

With Real Wealth, Joshua uses a strict and specific strategy to find good stocks to invest on the JSE.

He also occasionally, likes to share new alternative investments and investment instruments which South Africans can profit from.

This can range from ETFs, bonds, futures and so on…

With Real Wealth, Joshua tends to hold his investments anywhere between 2 to 5 years.

Over the last 9 years, Real Wealth has generated an average return of 21.32%… And this year has been no exception.

In fact, the portfolio is sitting with a positive return of 7% - easily crushing the JSE All Share.…

You can read more about Real Wealth by clicking here…

With The South African Investor, the analysts usually look for revolutionary tech investments through both local and international markets.

This can range from shares, ETFs, structured products to now Crypto-currencies and blockchain technology.

SAI has a long-term view of about 5-10 years, which aims at people looking to build wealth for their retirement.

In fact, since SAI started around 19 years ago – it’s managed to build a solid portfolio. Over the past 3 years, SAI has locked in…

408.41% from Sanlam
207.7% from Famous Brands
98.52% from Resilient
64.42% from Vodacom
101% from ServiceNow

And this year, the SAI offshore portfolio is up 14.96% - easily beating the S&P 500’s 2.88%.

You can read more about The South African Investor by clicking here…

Timon Rossolimos,