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Strategies & Market Trends : DAYTRADING Fundamentals -- Ignore unavailable to you. Want to Upgrade?

To: brec who wrote (8155)	4/30/2000 10:11:00 PM
From: Dan Duchardt	Read Replies (1) \| Respond to of 18137

brec, That wasn't really my argument. (That shorts are more risky may or may not be true, but it's not what I'm saying.) I'm saying that the change in risk as the position incurs unrealized losses is positive for shorts and negative for longs. I apologize if I put words in your mouth. To my mind though, saying that the change in risk is positive if a short moves against you carries with it the corollary, based on a symmetric argument, that the change in risk is negative if a long moves against you. Those two factors combined lead to the inescapable conclusion that shorts are more risky than a longs. I'll own that conclusion and not lay it on you. But don't forget that I also pointed out the greater risk is accompanied by greater potential reward for the short position once you find yourself on the wrong side looking for a recovery. Once again there is a symmetry of argument that must lead to the conclusion that when the position goes in your favor, the long position carries a greater risk of a future loss from current value than the short position, but also carries greater potential gain. The logical extension of these arguments is what leads to the well known limiting case conclusions: With a long, the potential gain is unbounded, while the gain on a short can never be more than the short sale price. With a short, the potential potential loss is unbounded, while the loss on a long can never be more than the purchase price. The bottom line is that both risk and potential future gain increase with the value of the security in question. Higher risk does not mean that initially a short position is any less desirable than a long position, but it certainly does mean that a short moving against you is more alarming than a long moving against you. That's because we tend to be more tolerant of a drawdown that reduces a net gain than we are of losing what we start with, being willing to accept the added risk with added future potential gain when things are moving in our favor. Dan