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cwn72

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This has to do with Compound growth and decay when the two are combined. This occurs in trading(ie stocks,options,futures,etc.) And I am hoping I can find an accurate formula that describes the nature of this idea.

The main Idea is that when compound growth and decay are added together, they tend to go towards zero. Ex)

Starting with $100, risk is 10% and reward is 10%. The chance of a win is 50%, chance of a loss is 50%.

On the first trade we win:

$100 + $10(10%) = $110.

On the next trade we lose:

$110 - $11(10%) = $99.

As you can see, one win of 10% and one loss of 10% does not result in the starting balance, but tends to get closer to zero. Also, the order of these wins/losses is not important.

I have not been able to find a formula that explains this phenomena, or even what this concept is called.