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Fix calculation to not show losses > initial investment

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Matthias 2020-10-08 10:24:52 +02:00
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docs/edge.md
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@ -82,14 +82,14 @@ Risk Reward Ratio ($R$) is a formula used to measure the expected gains of a giv
$$ R = \frac{\text{potential_profit}}{\text{potential_loss}} $$
???+ Example "Worked example of $R$ calculation"
Let's say that you think that the price of *stonecoin* today is $10.0. You believe that, because they will start mining stonecoin, it will go up to $15.0 tomorrow. There is the risk that the stone is too hard, and the GPUs can't mine it, so the price might go to $0 tomorrow. You are planning to invest $100.
Let's say that you think that the price of *stonecoin* today is $10.0. You believe that, because they will start mining stonecoin, it will go up to $15.0 tomorrow. There is the risk that the stone is too hard, and the GPUs can't mine it, so the price might go to $0 tomorrow. You are planning to invest $100, which will give you 10 shares (100 / 10).
Your potential profit is calculated as:
$\begin{aligned}
\text{potential_profit} &= (\text{potential_price} - \text{entry_price}) * \text{investment} \\
&= (15 - 10) * 100\\
&= 500
\text{potential_profit} &= (\text{potential_price} - \text{entry_price}) * \frac{\text{investment}}{\text{entry_price}} \\
&= (15 - 10) * (100 / 10) \\
&= 50
\end{aligned}$
Since the price might go to $0, the $100 dollars invested could turn into 0.
@ -97,15 +97,16 @@ $$ R = \frac{\text{potential_profit}}{\text{potential_loss}} $$
We do however use a stoploss of 15% - so in the worst case, we'll sell 15% below entry price (or at 8.5$).
$\begin{aligned}
\text{potential_loss} &= (\text{entry_price} - \text{stoploss}) * \text{investment} \\
&= (10 - 8.5) * 100\\
&= 150
\text{potential_loss} &= (\text{entry_price} - \text{stoploss}) * \frac{\text{investment}}{\text{entry_price}} \\
&= (10 - 8.5) * (100 / 10)\\
&= 15
\end{aligned}$
We can compute the Risk Reward Ratio as follows:<br>
We can compute the Risk Reward Ratio as follows:
$\begin{aligned}
R &= \frac{\text{potential_profit}}{\text{potential_loss}}\\
&= \frac{500}{150}\\
&= \frac{50}{15}\\
&= 3.33
\end{aligned}$<br>
What it effectively means is that the strategy have the potential to make 3.33$ for each $1 invested.