Risk Management: The unfortunate case of Tantech Holdings Ltd (NASDAQ:TANH)

So far Tantech Holdings Ltd (NASDAQ:TANH) has given me the biggest loss by absolute value (-25.88%). There are other trades that has given me a bigger loss by percentage but TANH sudden 30% gap down on market open on 27th Sept 2017 led me to take this opportunity to highlight the importance of risk management.

My system gave me a buy signal for TANH a few weeks ago in mid September. I entered a position at 3.71. Judging from the price chart, it appeared to have a nice upward trend. Unfortunately I was caught off guard on 27th Sept 2017 when it suddenly gapped down 30%+ . There was a news that 

it has entered into agreement for registered direct placement of $6.5 million common shares and warrants with some institutional investors. I tried to do some research over the internet, looking for news, analysis, even StockTwits but I could not find any logical enough explanation to warrant such kind of sudden drop. There were not much analysis on this stock and many were scratching their heads not knowing the reason for the sharp drop. The stock just gapped down out of the blue!

This is a good example of a stock that went in the wrong direction. It seems irregardless of the amount of fundamental or technical analysis done, there will bound to be such cases in your trading journey especially when the overall market is already going south That is where risk management can save you from the risk of ruin. Lets say in the worst case scenarios, you have invested 100% of your portfolio into this stock, you would have loss 30% of your capital in 1 week! To get back to your 100% capital, you need to gain 1- (100/70) X 100% = 42.86% of profit in your future trade. Similarly, if you loss 50%, you will need to gain 100%. The more your loss, the more you need to gain to break even. That is why maximum drawdown is highly emphasized in determining the risk of a fund.

Definition of maximum drawdown: 

A maximum drawdown (MDD) is the maximum loss from a peak to a trough of a portfolio, before a new peak is attained. Maximum Drawdown (MDD) is an indicator of downside risk over a specified time period.

Courtesy of Investopedia

Fortunately, I only invested about 8% of my total portfolio amount. I sold the stock at a 25% loss but that only amounts to 2% loss to my entire portfolio so my portfolio survived and have a better chance to recover my losses in other future trades. 

The bottom-line is you need to have sound risk management practices in play to prevent the risk of ruin. Honestly speaking, the risk management of my current system is rather basic but it is good enough for small timer like me.

Profile

Tantech Holdings Ltd. develops and manufactures bamboo-based charcoal products in the People’s Republic of China and internationally. The company operates through three segments: Consumer Products, Trading, and Energy. It produces pressed and formed charcoal briquettes for use in grills, incense burners, and other applications under the Algold brand. The company also offers Charcoal Doctor branded products, such as air purifiers and humidifiers, automotive accessories for air purification, underfloor humidity control, pillows and mattresses, wardrobe deodorizers, mouse pads and wrist mats, refrigerator deodorants, charcoal toilet cleaner disks, liquid charcoal cleaners, shoe insoles, and decorative charcoal gifts. In addition, it provides bamboo vinegar, a liquid byproduct that is used in disinfectants, detergents, lotions, specialized soaps, toilet cleaners, and fertilizers, as well as in various agricultural applications; and bamboo carbon for use in EDLCs. The company sells its products directly or indirectly through distributors for industrial energy applications; and household cooking, heating, purification, agricultural, and cleaning uses. It also exports its bamboo vinegar, bamboo charcoal purification, and EDLC carbon products. Tantech Holdings Ltd. was founded in 2001 and is headquartered in Lishui, the People’s Republic of China.