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

wxytrader said:
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.
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PA and news affects sentiment, which then feeds on itself.

LOL perpetual downtrend - the things that people say. SMH
 
padutrader said:
NO ONE SAYS IT DOES NOT

they only say that if it drops 50% it has to recover by 100% to recover.....
that is absolutely true.
it is math
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No. They are implying that it will be harder for the stock to recover because it has to recover 100% which is the fallacy.

Read it again.

""A stock that declines 50% must increase 100% to return to its original amount. Think about it in dollar terms: a stock that drops 50% from $10 to $5 ($5 / $10 = 50%) must rise by $5, or 100% ($5 ÷ $5 = 100%), just to return to the original $10 purchase price. Many investors forget about simple mathematics and take in losses that are greater than they realize due to emotional distress. They falsely believe that if a stock drops 20%, it will simply have to rise by that same percentage to break even.""

The stock will just as easily go up $5 as it dropped $5...the math doesn't matter.
 
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wxytrader said:
You guys seriously can't be this dense? Price moves in increments of money, not in increments of "how much percent does this need to increase to overcome a previous drop in percent from some arbitrary price point". If this trading fallacy were true, it would be statistically impossible to consistently return to a previous price level, forcing the market to be in an eternal down trend lol.
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Mathematically you cant win,but this was a brilliant rebuttal! :D

Nicely done!
 
You have $5000 in savings and crash your car with no insurance.

It costs $5000 to fix your car.

You think you are back to break even,but actually you don't have the $5000 savings back yet.

I'm not particularly happy with this analogy but its the best I can come up with right now for someone struggling to get it.
 
This is how SWHFT* firms secretly have been making money for years: sell the 0.0001% fall and buy the 0.00011% rise. So tiny and fast, nobody noticed.

*Super Warpspeed High Frequency Trading (AI powered)
 
semperfrosty said:
You have $5000 in savings and crash your car with no insurance.

It costs $5000 to fix your car.

You think you are back to break even,but actually you don't have the $5000 savings back yet.

I'm not particularly happy with this analogy but its the best I can come up with right now for someone struggling to get it.
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You guys are really struggling with this concept. You are confusing P/L math with price action. If a stock drops from $10 to $5 then it needs to rise by $5 to return to even. Calculating the percent drop and percent recovery is irrelevant. It has no bearing on the probability of the stock returning to its previous level. The probability of price returning to a previous level would depend on factors such as is it range bound? What's the ATR? Was there a catalyst? etc

Example: A stock is $10 and drops by 2% to $9.80. If the stock increases by the same 2% you will only have $9.996

Nobody is disputing that.

What the traders fallacy is referring to is the perception that it's harder for stocks to return to any previous price level because they are perpetually having to over come a mathematical hurdle. If this were true, then the entire stock market would be in a perpetual downtrend lol.
 
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