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Technology Stocks : LSI Corporation
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To: Beachbumm who wrote (9495)2/6/1998 1:00:00 PM
From: Jock Hutchinson  Read Replies (2) of 25814
 
Dear Beachbumm--Here is the correct formula that applies to equal percentage gains and losses. The percentage return that one can expect on his investment when he/she has an identical gain and than an identical percentage loss is 100 minus (the percentage of equal gain and loss squared divided by 100) i.e. 100-(%2/100) where % is the applicable percentage and 2 simply means squared What it demonstrates is the successful trader's mantra of loving little losses but despising huge losses. For example if you make one percent on a trade and then loose one percent, your total loss will
be equal to one one hundreth of one percent of the initial investment. At five percent your loss increases to only twenty five one hundreth's of a percent-not much but twenty five times the loss of one percent.

But here is where it really gets very compelling for those people who derided me about my so-called new math. At a ten percent gain and subsequent loss the total loss of capital is only one percent. Whereas in the example of a fifty percent gain and a subsequent fifty percent loss, the total loss of capital is twenty five percent or a total of twenty-five times the loss when working with the ten percent example. That's right. I'll state it once again. This scenario is twenty five times more painful than where you have a loss of and gain of ten percent--so the next time you use your decision point as your point of purchase ( i.e "I just wanted to break even and not loose)remember that in essence your percentage losses increase exponentially in terms of what it takes to get back to even. And this is why EVERY successful short term trader has a greater absolute number of losses for the year, and lets his profits ride.

Finally, I apologize for the spelling of lose (sic. loose)

Good luck and Good Health
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