<<For example, take a hypothetical situation where 2 trades are made one where the price went from $1 to $2 for 100% return and another that went from $2 to $1 for a -50% return. Taking the average gives you an average of 25%/trade when obviously the net result is no profit.>>
assuming your account is 10,000
it depends on how you trade those 2 positions, simultaneously or serially ...
serially, 10,000 going from $1 to $2 will get you to 20,000 and 20,000 going from $2 to $1 will get you back to 10,000
simultaneously, 5,000 going from $1 to $2 will get you to 10,000 and 5,000 going from $2 to $1 will get you to 2,500,
hence you total is 12,500 which in fact is 25% gain ...
I think a lot of the problem with newsletters claiming they make 300% a year is have 300 trades making 1% each, and they just added up all the percentage gain, this would be highly unlikely for an individual to bet 100% of his money on each trade ...
if you have 10 winners of 1% each
serially - you will have a gain of at least 10%
simultaneously - 10% position on each of the 10 stocks and if each gain 1%, your portfolio is only gaining 1%
huge difference ... |
