Drawdowns and loss recovery

I was doing some checking into leveraged ETF performance as compared to index that it tracks to find that they are not good candidates for long term holding, they are really a swing, trend or day trading vehicle. I won't get into that here now though. It reminded me of a part of my plan that almost goes without saying, but I have never written it down anywhere.

Draw downs, whether overall losses or just profit losses do not change the target goals. Currently I still use the 1% per trading day on average as a target goal. I have not really been doing much trading lately to be able to see even that goal as I have been playing and testing for quite some time.

I read many comments and articles that talk about grudge trading or revenge trading or trading to get back lost profits or lost capital. The trouble is that a 10% loss on a $5000 account leaves $4500 left to work with. In order to get back to $5000 I would have to see a 11.1% gain. The larger the loss the greater the necessary gain to return to breakeven therefore the more work involved in trading it back.

The point is that no matter how much my portfolio is reduced, I still aim for the 1% daily average performance as it fits my timeline for my financial goals. Trading targets are just targets. Raising the target to try to cover a loss is asking for trouble as whatever created the loss in the first lace is liable to be leveraged into a greater loss again.

With a small portfolio trading one stock or ETF at a time with maximum position sizing based on the account balance, the trade size is automatically reduced after a major drawdown. This reduces the chance of trying to trade it back.

I have reset my balance a few times and just worked with what is left as the capital. My first 1% was based on a $5000 balance so a $50 day is the average target. When I started with $4000 it is then a $40 target. In March, depending on whether I get more trading in this week or not I will start with a $4200 balance. I would reset the starting balance at the beginning of each month regardless of my actual profit or loss. This is a bit of a head game as I definitely do not want to be trying for larger targets just because I had a poor run of trading.

I wonder when a profit becomes capital anyway? Personally I consider it just the balance and the capital is only ever the starting cash that is put into the account in the first place to get things going. Having said that at the begining of each month I could consider that the captial base for the month as I am always in cash at the end of the day.

I will be tracking the return on the initial cash infused into this plan at some point but it is not a target based tracking, only performance.

For example, today was a $121.36 day on one trade. That is 3% based on my $4000 at month's start.

Jeff.