How many times do you need to be right when investing ?
Simple question: you buy a stock at 100$. The price goes down 50% the same day, then goes up again 50% the next day. How much is your stock worth? The obvious reason is of course -50 + 50 = 0, the stock is worth 100$. Wrong. The real answer is 75 $. Day 1 : 100 $ – 50 % = 50 $ Day 2 : 50 $ + 50 % = 75 $ If the order is reversed, you have a 50% win first day and then a 50% loss second day, the result is the same: Day 1: 100 $ + 50 % = 150 $ Day 2: 150 $ + 50 % = 75 $ In order to break even, you need to have a win to loss ratio of 2 to 1, so if you lose 50% one day, you must make 100% to win it back. Day 1 : 100 $ - 50% = 50 $ Day 2 : 50 $ + 100% = 100 $ This is why when people talk about risk management in trading, there is the ubiquitous rule of Risk- Reward of at least 2 to 1. Fair enough. But how many times do you need to be “right” to make money? This is a chart of the % of...