a 10% loss
a 10% loss
a 10% loss
a 40% gain (yeah!)
This cycle repeats over and over. You keep your losses tighter, let the gains run a little (sure you heard this one before
With this cycle, if we were to start with a $10,000.00 trading account, we would see something like this after 20 trades:
$10,000.00
$9,000.00
$8,100.00
$7,290.00
$10,206.00
$9,185.40
$8,266.86
$7,440.17
$10,416.24
$9,374.62
$8,437.16
$7,593.44
$10,630.82
$9,567.74
$8,610.96
$7,749.87
$10,849.81
$9,764.83
$8,788.35
$7,909.51
$11,073.32
Cool, we got our 10% gain on the account, but, what happened to that compounding effect?
Compounding compounds losses more than gains. Every gain made after a loss is a gain on a smaller capital amount, every loss made after a gain is made on a larger capital amount. Hmmmm..... somebody is gettin screwed here!
Ok, now, a suggestion. Start each day with the same buying power, regardless of profit or loss of the previous day. Say we have the same 10K account, but this time we have a "draw-down" account to go hand in hand with the main account. The draw-down account is a portion of capital set aside to replenish or accumulate the past losses or profits of previous days. For example, we have a 5K draw down account. If the 10K takes a 10% loss, we take the 1K we lost, borrowing it from the draw-down account, and begin the next day back at 10K in buying power. Now, you say "Well, now it is really a 15K account!". Well let's put the same win/loss ratio to work here, each day we bring the account back to 10K.
at the end of each trading day, for 20 days, we end up with these values:
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00
$9,000.00
$9,000.00
$9,000.00
$14,000.00
Every time we went down 1K, we took it from the draw down account, each day we were up 4K we deposited to the draw down account, so the draw down account had this rolling sum.
$4,000.00
$3,000.00
$2,000.00
$6,000.00
$5,000.00
$4,000.00
$3,000.00
$7,000.00
$6,000.00
$5,000.00
$4,000.00
$8,000.00
$7,000.00
$6,000.00
$5,000.00
$9,000.00
$8,000.00
$7,000.00
$6,000.00
$10,000.00
At the end of 20 trades, we brought back our buying power to 10K and have 10K in the draw-down account for a net gain of 5K on 15K of capital. This is a 33% return as compared to our previous 10-11% return using the same technique.
I suggest using a draw-down account (can be in the same account, just capital provisioned for replenishing buying power.)
Good luck!
