Literally, plot daily gains vs daily losses of S&P. If you only take 70% of the losses but get 70% of the gains (so multiply each win/loss % element in the series by 0.7, and apply the new sequence to a portfolio balance), you'll end up doing better than the market.
How about this, below is the link to the data (S&P 500 daily returns), whoever is right will donate money to an education-related charity at 70% of the dollar amount donated by whoever is wrong. So for example if you are correct, I will donate $100 and you donate $70, and vice versa.
Happy to chat about it more if you want. But just intuitively and quickly everyone should be able to see why one can't say an equal 70% up/down capture ratio will just beat the market...
1. let's agree the market can do whatever the hell it wants. Up, down, whatever.
2. Imagine a market is down -5% and then up 10%. According to your story and capture ratios, when this happens your portfolio is down only -3.5% and then up 7%. Right? 70% of the down and 70% of the up?
I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market.
Maybe an even quicker intuitive answer: If a 70% up/down capture ratio portfolio will beat the market, why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that?
I interpret it as if you are only correct half of the time, you can make money by letting your winning positions run and cutting your losses. Many winning traders talk about limiting your losses and risk management as being key.
Anyway, it's a bit too harsh to downvote. He's just answering a question, and correctly says if you lose 5%, you need to make back more than 5% to get back to even.
dave_sullivan|9 years ago
https://blog.thinknewfound.com/2016/05/the-asymmetry-zone/
Literally, plot daily gains vs daily losses of S&P. If you only take 70% of the losses but get 70% of the gains (so multiply each win/loss % element in the series by 0.7, and apply the new sequence to a portfolio balance), you'll end up doing better than the market.
qwrusz|9 years ago
How about this, below is the link to the data (S&P 500 daily returns), whoever is right will donate money to an education-related charity at 70% of the dollar amount donated by whoever is wrong. So for example if you are correct, I will donate $100 and you donate $70, and vice versa.
Trader? Risk taker? For charity?
Here's the link: https://fred.stlouisfed.org/series/SP500/downloaddata
Happy to chat about it more if you want. But just intuitively and quickly everyone should be able to see why one can't say an equal 70% up/down capture ratio will just beat the market...
1. let's agree the market can do whatever the hell it wants. Up, down, whatever.
2. Imagine a market is down -5% and then up 10%. According to your story and capture ratios, when this happens your portfolio is down only -3.5% and then up 7%. Right? 70% of the down and 70% of the up?
I think you will find in just this example the market beats your portfolio by more than 1% here. This is just a simple example and I am being generous. When you look at real data you will not only find a similar pattern, but your portfolio gets absolutely crushed by the market.
Maybe an even quicker intuitive answer: If a 70% up/down capture ratio portfolio will beat the market, why isn't this a huge thing and everyone sells/changes their regular full market S&P 500 ETFs to do that?
appleiigs|9 years ago
Anyway, it's a bit too harsh to downvote. He's just answering a question, and correctly says if you lose 5%, you need to make back more than 5% to get back to even.