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…

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The 6 Thinking Hats

 

If you don’t know the 6 Thinking Hats by now, I have to ask.

How do you solve problems, deal with arguments or make decisions?

I do forgive you though, as these strategies are not ones we learn in school.

In fact, when I first read about this strategy, I got to say every aspect of my life changed (including trading).

I hope this article will change your life too.

Let’s start with the main man himself.

The Author of The Six Thinking Hats

Edward de Bono is a world-renown lateral thinker, writer and philosopher.

In fact, he was the first person to use the term ‘Lateral Thinking’.

Born in 1933, in Malta, Edward has achieved a number of degrees and has published over 85 books (mostly on thinking and the use of language).

But out of all his works of art, there is one of the most popular techniques that changed the world and changed the way we think.

It’s called The Six Thinking Hats or 6TH.

Here’s how it works

There are six different imaginary hats, with each having a different colour.

Each time you put on a hat, you change the way you think about something. It also helps you see with better clarity and with a different perspective.

Whether you’re having an argument, making a decision, solving a problem, building a business or creating a trading strategy – the 6 Thinking Hats will help streamline the process.

If you’re with more people, make sure everyone is wearing the same hat at a time, to avoid conflict.

Let’s now get into the inner workings of the 6 Thinking Hats, and how it can apply to your trading and other aspects in life. 

HAT #1: WHITE
NEUTRAL VIEW

This is the hat that contains all of the information, facts, data, figures, metrics and statistics.

When it comes to trading there are certain facts that you need to have considered including:

The broker you choose

The affordability

The costs involved

What equipment you have to trade

Back testing, forward testing and real testing data and statistics with your strategy.

HAT #2: RED
EMOTIONAL VIEW

The second hat you’ll put on is the RED HAT.

When you put this hat on, come to terms with what you feel.

I’m talking about your intuition, your fear, your greed and your gut feeling.

Then when it comes to trading ask yourself these questions…

·       Can you handle risking money you have?

·       Do you feel you have the discipline to pursue trading on a weekly basis?

·       Do you enjoy the idea of trading?

·       How much money do you think you can easily deposit into your trading account?

·       How much money do you think you can psychologically handle losing, if you take 10 losing trades in a row?

·       Do you think you can sleep easily at night knowing you have your money tied up in the markets?

Once you go through all the feelings and you answer the questions, then you can move to the third hat.

HAT #3: YELLOW
POSITIVE VIEW

This is the hat you’ll find is the one, you want to leave on when you think.

It’s the hat that contains all the benefits and rewards.

When you put this hat, you’ll think of the following with trading:

What are the benefits to trade?

How much money do you want to make a year trading?

Why will your trading strategy work?

What are your goals as a trader?

Why is trading the best decision for your financial future?

 

Feeling good? Well you’re supposed to when you put on the yellow hat.

But we still have three more hats to go…

HAT #4: GREEN
CREATIVE VIEW

With every decision comes extra out of the box thinking. And that’s where the green hat comes in.

When you put on the green hat, this is where your imagination should help you with brainstorming, new ideas and add-ons to the think tank process.

With trading, there are just so many different ways to be creative. And you’ll find that with ever evolving markets, you’ll need to adapt and adjust course.

Here are some ideas to think of when you put on the green hat.

• How can I let my winners run further systematically?

• How can I increase my win/rate i.e. Trailing stop loss

• What indicator can I use for peripheral vision to help with my confirmation on each trade?

• I should create and print a few psychology sticky notes to help with my trading.

• I should name my system to be more personal with it

• I should find ways to tweak my system which will help with the performance

• I should have a trading consultation with Timon to help build and optimise my trading strategy better J.

HAT #5: BLUE HAT
PROCESS VIEW

When you put on the blue hat you should think of three main things…

Systems, criteria and planning.

This is where you’ll choose the criteria you’ll follow with your trading strategy.

What indicators are you using?

What parameter’s are you using with the indicators?

What time frame works best?

What calculators do you need whenever you trade?

This is where you’ll find the main work takes place once all the planning is done…

And one where you’ll eventually marry a strategy to help grow your portfolio.

HAT #6: BLACK HAT

NEGATIVE VIEW

When you put on the black hat, four things should arise instantly.

Difficulties, problems, weaknesses and risks…

I saved this hat for last, because it’s the only hat that will most likely help you decide whether trading is for you or not.

But you can re-arrange the hats according to your won preference.

The main things to ask when you put on the black hat, with trading is:

What are the dangers of trading, risks, financial risks and time risks?

What if the system stops working?

Why are you sceptical about trading?

What if the current markets go into an unfavourable territory?

What if the market drops to zero when I’m in a long trade? 

 

FINAL WORDS:

How awesome!

You now have The Six Thinking Hats to your every decision making process.

You’ll find that it will force you out of the mono-lateral way of thinking which you’ve habitually had your entire life.

You’ll see things with new perspectives and compartmentalize issues in new ways…

It might even pro-long your marriage or improve your relationships…

If you enjoyed this article, I would love to hear your thoughts… You can email me at Timon@TimonandMATI.com…

I do this for you everyday because I love it…

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6 Tips for a More Productive Work Day

 

Your mind often draws to items lying around – one tends to not focus as much when your desk is cluttered. Unclutter your mind by decluttering your desk.

List your goals – use that goal sheet to help you plan your workday by writing down smaller tasks that help you accomplish your ultimate goal.

Focusing when hungry is a near impossible thing – set reminders to not forget to get your nutrients in, we often only remember to eat when it’s too late.

You are trying to work on several things and because of your lack of focus, hardly anything gets done. Limit yourself to the individual tasks listed on your To-Do List.

Your body and mind take strain from workloads. Split your work load with 15 – 30 minute breaks to reduce overall strain.

Getting lost in Social Media has become an uncontrollable thing. Take a step away from all Social Media Platforms and limit yourself to only using them during work breaks.

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