Downfall

The Downfall #2 Drawdown

Drawdown is your biggest loss of capital over a period of time.
To calculate, simply take the highest point - lowest point / highest point.

With the example above, the highest point is $10,000, lowest point is $7,500.
Take (10000-7500)/10000 you will get 0.25. Which translate to your capital have suffered 25% drawdown.
In this part we simply wants to view our loss in terms of percentage.

How drawdown is the downfall of many is partly, the difficulty to comeback grows exponentially.

Needless to say, drawdown is feared among market participants. On the psychological aspect, heavy drawdown often leads to a shattering effect where people quickly all in with their remaining capital in hopes of winning back.

Sure enough, they almost always end up losing everything.

The Downfall #3

How bad is it to be trading/investing without knowledge of risk management? Imagine driving without understanding what traffic lights are for. You may be lucky for awhile, you might even make some good return in the short term. But eventually car crash will happen, it is not even accident.

The Downfall

Don't bet when you have negative expectation. Although the above sentence seems to be such a basic information, one probably need to do some math to fully appreciate the simplicity and precision of the message. I always tell others, regarding gambling, that you essentially only have two gains

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