Many of us must have experienced this phenomenon when started out trading, why is it so hard to recover??? We all are or have been drawn initially into trading with the lure of making easy money. But it’s not important to make money what’s more important is NOT TO LOSE MONEY!!! A very important and a critical fact we fail to consider (or rather choose to ignore) when trading - each time we lose money, it is harder to recover it back. And the more we lose the more difficult it becomes to get back to breakeven. Why?
Assuming we start a trading account with 10000 (just taking this figure so that math becomes easy)!
Lose 10% to 9000 - Now you need to make 1000 on 9000 or 11% to get back to breakeven.
Lose 15% to 8500 - Now you need to make 1500 on 8500 or 17% to get back to breakeven.
Lose 20% to 8000 - Now you need to make 2000 on 8000 or 25% to get back to breakeven.
Lose 25% to 7500 - Now you need to make 2500 on 7500 or 33% to get back to breakeven.
Lose 33% to 6700 - Now you need to make 3300 on 6700 or 50% to get back to breakeven.
Lose 50% to 5000 - Now you need to make 5000 on 5000 or 100% to get back to breakeven.
Lose 15% to 8500 - Now you need to make 1500 on 8500 or 17% to get back to breakeven.
Lose 20% to 8000 - Now you need to make 2000 on 8000 or 25% to get back to breakeven.
Lose 25% to 7500 - Now you need to make 2500 on 7500 or 33% to get back to breakeven.
Lose 33% to 6700 - Now you need to make 3300 on 6700 or 50% to get back to breakeven.
Lose 50% to 5000 - Now you need to make 5000 on 5000 or 100% to get back to breakeven.
Loosing 50% and you going to be really prayin hard….making 100% to get your trading account back to breakeven will be nothing short of a miracle! Therefore controlling you risk is very important since you will need to always make more to get back to break even!
While you are at it I would also advise you to read about Risk of Ruin by Kaufman!
Veru good one.I appreciate your knowledge and your efforts.
ReplyDeleteRegards
http://moneyvistas.blogspot.com/
Agree with you totally on contorlling the losses and never allowing them to grow beyond a limit.
ReplyDeleteIn any trade, we have 4 outcomes
1) Big profit
2) Small profit
3) Small loss
4) Big loss.
If we don't manage the 4th outcome, it is difficult to recover our account and see healthy upward sloping equity curve.
Happy Trading.
Trader Anup
MoneyVistas Hi
ReplyDeleteThanks for the appreciation!!!
Cheers!!!
Trader Anup Hi
ReplyDeleteYou have put this very nicely indeed!
Most of us most of the times are hitting point 2 and point 4 (myself included)!
Yes managing point 4 is THE BEGINNING to successful trading.
It was a pleasure to have you here!
Cheers!!!