OMG I can't believe this fallacy still exists in trading!

[wxytrader]

Well, it's kind of a linear thing. I mean if a $100 stock drops to $95 (a 5% loss obviously), one only needs to gain 5.62% to break even. $90---> a 10% drop---> you need 11.1% to break even. That's why most normal stocks can channel or trend in one direction or the other.

I can't think of too many stocks that channel in a 50%/100% range. Maybe some of those crazy Chinese stocks that appear out of nowhere for a few days that go from $10 to $200 and then to $3... but as a whole, not too many on the SPX.

And sure there'll be news events that may cause an oversold condition, but that breaks the channel, and if the news is nothing, the stock will return to the channel once the dust settles.

There will always be exceptions... but for every NVDA and META.... you can find a SNAP and TWLO.

Yes but my point is that even though a stock drops from 100 to 95 (5%) and it takes 5.62% to return to 100 does not mean that the stock is at some mathematical disadvantaged to return to 100. The stock will go down $5 and $5 with the same sentiment.

 

[SunTrader]

Yes, but you are talking about sentiment, and basing a trading decision on that, not on the fallacy that it will somehow be harder for the stock to return to its previous level. If sentiment changes the stock will return to that level. The traders fallacy is claiming that with sentiment being equal, somehow the math will hold it back lol. If that's not the case then why is it even a thing?

The whole premise is wrong. If a position goes from $100 to $50, then it needs to gain $50 to be even again. That's it. There is no math or probabilities handicapping it's movement. The only thing that matters are market factors. What the traders fallacy is basically trying to say that if a stock drops from $100 to $99 then it will be harder for it to return to $100 because of math...not market factors. (100-1%=99+1% is 99.999 not 100) so theoretically the market would be in a terminal state of decline.

You'll understand one day ... maybe.

BTW you brought sentiment into it. Not me.

I'll stick with simple math.

 

[Drawdown Addict]

You guys seriously can't be this dense?

That sentence is present in all his threads. He calls people "dense" when he is thick as hell.

 

[Jzwu2017]

I don’t know about others. However, I can easily hold a stock dropping from 100 to 50 but rarely holding a winner from 50 to 100. So the math works for me in a bad way.

Even though OP is correct that stock price can go up or down the same amount symmetrically it’s not so for most traders/trading accounts.

 

[vanzandt]

Yes but my point is that even though a stock drops from 100 to 95 (5%) and it takes 5.62% to return to 100 does not mean that the stock is at some mathematical disadvantaged to return to 100. The stock will go down $5 and $5 with the same sentiment.

Sure... some stocks are more volatile, more actively traded, and the moves are bigger. TSLA makes your case perfectly. +/- 4% days are normal for it. And there's stocks that make big moves down after an earnings report, only to retrace back up in a few sessions.

It all depends on which stock you are talking about and the reason behind the drop. If some stalwart blue-chip gets cut in half for a good reason and you own it.... you might as well look at that and say "I need a 100% gain from here and that is highly unlikely to happen", because it is highly unlikely to happen. Even a 30% drop.

But sure, you take a stock like C3AI ($AI) --- with a low float, WSB's, high short interest, etc... yeah all bets off. $40 one week, $25 the next, $45 the next. But you won't see that with say... a Home Depot. If it gets cut in half, you're f'd.

 

[comagnum]

WXY - you're not factoring in that after a 50% drop the trader can buy twice the number of shares with the same cost basis.

 

[Drawdown Addict]

I don’t know about others. However, I can easily hold a stock dropping from 100 to 50 but rarely holding a winner from 50 to 100. So the math works for me in a bad way.

Embrace the drawdown!

 

[smallfil]

This guy misses the bigger picture. When your stock drops from $100 to $50, you have lost 50% of your monies. So, if you started with $10,000, you are now down to $5,000 and have to start at a lower capital base to try and get even and make up that $5,000, just to break even. A very huge hole to get out of! In one of the pillars of Ed Seykota's trading, he says to cut your losses and let your winners run. That is the only way you will make huge monies in the stockmarket.

 

[wxytrader]

WXY - you're not factoring in that after a 50% drop the trader can buy twice the number of shares with the same cost basis.

All I'm saying is if after a 50% draw down, your only reasoning to sell your position is because you believe that the math is against the stock recovering then you would be wrong in your assessment. The math actually supports that the stock will recover and most likely continue to higher highs ...just look at any index.

 

[wxytrader]

You'll understand one day ... maybe.

BTW you brought sentiment into it. Not me.

I'll stick with simple math.

What are you talking about? Sentiment is what affects price action . If the "simple math" actually affected price action then the market would be in a perpetual downtrend when in reality it's in a perpetual uptrend.