Cutting Losses

[saer1212]

Hi,
I read the statement below in an article can someone please help me understand the "basic" math he talks about. I cant get how you need to recover such a large % just to break even.

Thanks a lot
Below is the statement.

Another critical reason to cut every loss short is the basic math of how large losses work against your portfolio. An 8% loss requires an 8.7% gain to break even. But as the size of the loss grows, the required break-even gain grows even faster. A 50% loss requires a 100% gain, and a 75% loss requires a whopping 300% gain just to recover the loss.

Read More At Investor's Business Daily: http://education.investors.com/inve...ule-to-prevent-large-losses.htm#ixzz3JyAsINw6
Follow us: @ibdinvestors on Twitter | InvestorsBusinessDaily on Facebook

 

[lowesmith]

This work losses exponentially. I found this video interesting http://youtu.be/f_MYhlSSfKo but check if it would help your calculations.

 

[saer1212]

Thanks lowesmith I was hoping to get some reasoning. I will check it out and let you know what I think. I provided a thumbs up for your help.

 

[barjon]

Hi,
I read the statement below in an article can someone please help me understand the "basic" math he talks about. I cant get how you need to recover such a large % just to break even.

Thanks a lot
Below is the statement.

Another critical reason to cut every loss short is the basic math of how large losses work against your portfolio. An 8% loss requires an 8.7% gain to break even. But as the size of the loss grows, the required break-even gain grows even faster. A 50% loss requires a 100% gain, and a 75% loss requires a whopping 300% gain just to recover the loss.

Read More At Investor's Business Daily: http://education.investors.com/inve...ule-to-prevent-large-losses.htm#ixzz3JyAsINw6
Follow us: @ibdinvestors on Twitter | InvestorsBusinessDaily on Facebook

You start off with £1000 and lose 50% of it which leaves you with £500.

So you have a "starting pot" of £500 as you seek to get back to £1000. You need to make £500 profit to get back to £1000 (break even) which means you have to gain 100% on your starting pot of £500.

 

[L_Arciprete]

Hi,
I read the statement below in an article can someone please help me understand the "basic" math he talks about. I cant get how you need to recover such a large % just to break even.

Thanks a lot
Below is the statement.

Another critical reason to cut every loss short is the basic math of how large losses work against your portfolio. An 8% loss requires an 8.7% gain to break even. But as the size of the loss grows, the required break-even gain grows even faster. A 50% loss requires a 100% gain, and a 75% loss requires a whopping 300% gain just to recover the loss.

Read More At Investor's Business Daily: http://education.investors.com/inve...ule-to-prevent-large-losses.htm#ixzz3JyAsINw6
Follow us: @ibdinvestors on Twitter | InvestorsBusinessDaily on Facebook

I agree with barjon.
It has to do with the ratio between your account size, and the loss youre taking.

Its an exponential relationship because in order to break even, you have to win the money you lost with a smaller leverage than what your account previously offered.

 

[AJStanbridge]

An 8% loss. As a hypothetical example then any percentage will do I guess, but in reality, if you're talking about an 8% loss over anything shorter than a month, then discussing performance required to 'get back' to the starting level is at best pointless and at worst functionally debilitating. Anything that size over a short period needs to be written off on all levels, a line drawn and a fresh start made, after a decent break. As an independent, you need to make that decision yourself. As a professional, it will be made for you.

 

[gerryg]

Hi,
I read the statement below in an article can someone please help me understand the "basic" math he talks about. I cant get how you need to recover such a large % just to break even.

Thanks a lot
Below is the statement.

Another critical reason to cut every loss short is the basic math of how large losses work against your portfolio. An 8% loss requires an 8.7% gain to break even. But as the size of the loss grows, the required break-even gain grows even faster. A 50% loss requires a 100% gain, and a 75% loss requires a whopping 300% gain just to recover the loss.

Read More At Investor's Business Daily: http://education.investors.com/inve...ule-to-prevent-large-losses.htm#ixzz3JyAsINw6
Follow us: @ibdinvestors on Twitter | InvestorsBusinessDaily on Facebook

Remember about spreads. Cutting losses short means that you increase the number of entries, e.g. spreads your broker charges you. For example to enter standard lot position, 1:500 leverage (200 margin), my broker Hot forex charges 10 USD as spread in average (5%), and it can't be left unnoticed.. Think about it..

 

[AJStanbridge]

Gerry, you need to shop around.Where operational expense counts as a significant factor in P&L you cannot afford not to treat that with the same respect and diligence you would your core trading activities.

 

[archiemishra]

It is simple that if the person is having half loss than full profit will make him recover from that loss and also half will be his profit recovered from that investment.