How Much to Recover After a Trading Drawdown
A Drawdown is a drop in a portfolio value after one or more trades. It’s when the portfolio dips from the highest high.
Once you’ve entered into the inevitable drawdown phase, you’ll need to know how much you’ll need to recover.
That’s where the drawdown calculation comes in…
The Drawdown Formula to recover after a portfolio drop
Let’s use three examples of traders with drawdowns.
Example #1: Timon is down 5% of his portfolio in the last three months.
Example #2: Alex is down 50% of her portfolio in the last three months.
Example#3: Artemis is down 76% of their portfolio in the last three months.
Next we’ll need the Drawdown Formula
Required gain = [1 ÷ (1 – Percentage loss)] -1
Let’s put in three drawdown percentages to see what we need to recover to get our portfolios back to what they were…
EXAMPLE #1: Timon’s drawdown = 5%
Required Gain = [1 ÷ (1 – Percentage loss)] – 1
= [1 ÷ (1 – 0.05)] – 1
= 5.26%
EXAMPLE #2: Alex’s drawdown = 50%
Required Gain = [1 ÷ (1 – Percentage loss)] – 1
= [1 ÷ (1 – 0.50)] – 1
= 100%
EXAMPLE #3: Artemis’s drawdown = 76%
Required Gain = [1 ÷ (1 – Percentage loss)] – 1
= [1 ÷ (1 – 0.15)] – 1
= 316%
In the above examples, I need to recover 5.26% of my portfolio to get it back to its highest level.
While Alex and Artemis needs over 100% and 316% to return their portfolios to what they were.
Now you know how to calculate what you need to recover after a trading drawdown.
FINAL WORDS
Do you now get that you need to take your drawdowns more seriously?
With any business or venture, you should always be wary when you enter into a tough time.
In fact, you should never be down more than 20% on your trading portfolio, business or in any other financial venture…
Once you start going below 20%, it will take a heck of a lot longer to get back to what it was…
That’s why this article is only part one…
Trade well and look after yourself,
Timon Rossolimos
Founder, MATI Trader