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Restoring Lost Equity By The Percentages

Restoring Lost Equity By The Percentages

2011-10-13 22:45:00
Richard Krivo, Trading Instructor
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What many traders do not realize, however, is the very real challenge that is presented when one attempts to regain what they have lost.

The table below will provide some insight regarding that challenge…

How much return is required to remain unaffected by equity loss.

For example, let's say that you have a $1000 account and 25% of it, $250, is lost and you now have $750 in the account. $250 is 33% of $750. So the percent that you have to recoup, 33%, is actually greater than the percent that was lost, 25%.

Looking at the numbers on the grid, it becomes quite apparent why one should not risk large percentages of their account at one time. The recommended "ceiling" amount to risk at one time (not per trade but at one time) is no more than 5% of the account balance.

By the way, this table is excellent to keep at the forefront of one’s mind (or even posted nearby) when trading so that we are aware of the perils of overleveraging our account and posting significant losses relative to our account size. Seeing the hurdle that we face after such a loss, may keep us from taking inordinate risks and overleveraging our account in the first place.

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