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Strategies & Market Trends : APMP (formerly APM) -- Ignore unavailable to you. Want to Upgrade?

To: Bald Eagle who wrote (10504)	3/30/1998 5:16:00 PM
From: AlienTech	Read Replies (1) \| Respond to of 13456

>>WTM, my skull is a little thick<< I thought it was your beak that was thick,, but what do I know..

To: Bald Eagle who wrote (10504)	4/3/1998 10:48:00 AM
From: WTMHouston	Read Replies (1) \| Respond to of 13456

Explanation and examples of the averaging rules.... For these examples, I am going to assume that the initial pick is CTAL at 12. The examples demonstrate changes and the effects from there. The first 5 examples (set one) are the effects of averaging up. The second of examples (set two) are the effects of averaging down. FIRST SET OF EXAMPLES - AVERAGE UP The first set of examples assumes an initial pick at 12.00 and a decision to average up at 12.50, which produces an average price of 12.25.... 1. CTAL 12.00 12.50 +0.50 +4.16% 2. CTAL 12.25# 12.50 +0.25 +2.04% x 2 = +4.08% (actual is +4.16%) 3. CTAL 12.00 12.75 +0.75 +6.25 4. CTAL 12.25# 12.75 +0.50 +4.08 x 2 = +8.16% (actual is +8.25%) 5. CTAL 12.25 12.00 -0.25 -2.04 x 2 = -4.08% (actual is -4.00%) Example 1 ...... CTAL 12.00 12.50 +0.50 +4.16% Is just the normal gain without any averaging. Example 2 ...... CTAL 12.25# 12.50 +0.25 +2.04% x 2 = 4.08% This is the breakdown of this example. CTAL 12.00 12.50 +0.50 +4.16% CTAL 12.50 12.50 +0.00 +0.00% Avg 12.25 12.5 +0.25 +2.04% = +4.08% The average gain of 2.04% on the averaged position is doubled to 4.08% to reflect the total gain of the two position, which if broken down seperately would be a 4.16% gain. The small difference between the true total gain of 4.16% and the doubled average gain of 4.08% is caused by the adjusted basis. Averaging up will make it easier to get to a total 5% or 10% levels with a smaller upward move. We are simply doubling the averaged gain because it is easier to track and follow: I don't have to keep to sets of entries; call it a commission.... Example 3 ..... CTAL 12.00 12.75 +0.75 +6.25 Is, again, just the normal gain without any averaging. Example 4 ..... CTAL 12.25# 12.75 +0.50 +4.08 x 2 = 8.16% This example compares the stock price at 12.75 that was averaged up to 12.25 when the price was at 12.50. In this example, the average up pays off and the price continues to rise. The breakdown is: CTAL 12.00 12.75 +0.75 +6.25% CTAL 12.50 12.75 +0.25 +2.00 Avg 12.25 12.75 +0.50 +4.08 x 2 = 8.16% Again, the doubled 8.16% is close to the true total gain of 8.25%. It is not exact, but doing this way is much easier than making the dual entries and is close enough.... Example 5 ..... CTAL 12.25 12.00 -0.25 -2.04 x 2 = -4.08% In this example, the average up has not paid off. The price has dropped back to $12. The breakdown is: CTAL 12.00 12.00 +0.00 +0.00% CTAL 12.50 12.00 -0.50 -4.00% Avg 12.25 12.00 -0.25 -2.04 x 2 = -4.08% This player would lose 2 points rather than 1 since the average did not pay off. As with the real world, when you double the risk, you double the potential consequences. SECOND SET OF EXAMPLES - AVERAGE DOWN The second set of examples assumes an initial pick at 12.00 and a decision to average down at 11.00, which produces an average price of 11.50.... 6. CTAL 12.00 11.00 -1.00 -8.33% 7. CTAL 11.50* 11.00 -0.50 -4.35% x 2 = -8.70% (actual is 8.33%) 8. CTAL 11.50* 11.75 +0.25 +2.17% x 2 = +4.34% (actual is 4.74%) 9. CTAL 11.50* 10.50 -1.00 -8.70% x 2 = -17.40 (actual is Example 6 ..... CTAL 12.00 11.00 -1.00 -8.33% This is the normal effect of a $1 price decline. Example 7 ..... CTAL 11.50* 11.00 -0.50 -4.35% x 2 = -8.70% This example shows the initial effect of an average down at $11 to an average price of $11.50. The breakdown is: CTAL 12.00 11.00 -1.00 -8.33% CTAL 11.00 11.00 -0.00 +0.00 Avg 11.50 11.00 -0.50 -4.35 x 2 = 8.70% Here, the effect of the average down is slightly negative because of the effect of the adjusted basis. If the week ended up this way, the player would lose 2 points instead of 1. Example 8 ..... CTAL 11.50* 11.75 +0.25 +2.17% x 2 = -4.34% In this example, the opening position was $12, it was averaged down at $11, to an average of $11.50, and has now gone back up to $11.75. The breakdown is: CTAL 12.00 11.75 -0.25 -2.08% CTAL 11.00 11.75 +0.75 +6.82 Avg 11.50 11.75 +0.25 +2.17 x 2 = 4.34% (actual is + 4.74%) This example demonstrates the potential benefit from averaging down. Even though the initial position is still down -0.25, the averaged position is up +0.25....as with the other examples, we double the percentages for a total gain of 4.34%....As before, the actual total gain is 4.74%, but is simply doubled to make it easier to keep up with. As you can see, just a little more gain to the initial level and the player would be up over 5% with the doubled position rather than even or slightly down with the initial position. Example 9 ..... CTAL 11.50* 10.50 -1.00 -8.70% x 2 = -17.40 In this example, the average down bet has not paid off and the stock price has sunk to $10.50. The breakdown is: CTAL 12.00 10.50 -1.50 -12.50% CTAL 11.00 10.50 -0.50 -4.55% Avg 11.50 10.50 -1.00 -8.70% x 2 = -17.40% (actual is -17.05%). Here, the total true loss is -17.05%, but will show up as -17.40 because of the effect of the averaging on the basis....This player would lose 2 points rather than 1. CONCLUSION I hope that these examples make it more clear and understandable. I recognize that doubling the percentage from the adjusted basis is not exact, but it is pretty close, and makes it much easier on me to keep and calculate the totals. At the same time, it gives the players a mechanism, should they chose to use it, to attempt to maximize their gains (and thus, get more points) or to pull a gain out a stock that moves but was just entered at the wrong time....I expect that this, like the rest of the game, may have a learning curve, but that it will make things more interesting and fun in the long run. If you have more questions, let me know. Troy