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

[SunTrader]

You guys are really struggling with this concept. The problem isn't the math ..the problem is you think the math will affect price action. If a stock drops from $10 to $5 ..it only needs to rise by $5 to return to even...it does not matter what price it came from. You are applying your own personal P/L to price action...price action does not know your personal P/L

Take a look at all the stocks ... that didn't come back.

Those who went to 0.00 IOW bust. Or those who sit languishing for years and years.

Like GE, for instance. Made all time high in 2000. Still hasn't even made a 30% retracement back up!!!!!! Gezzus. Bet many current hodlers said to themselves. Yep it'll come back, its only down $20, what's that. Pfft. Well ok now it's only $30, $40, $50 etc.

But simple math aggggggggggggain tells you a stock that drops from $2 to $1, needs a 100% move to make it back to $2. With me so far? Another stock that drops from $200 to $100 needs the same 100% move to make it back to original price $200

Which has a greater probability of happening? Especially in a timely manner - like oh within a calendar year. Repeat, greater probability.

We are not struggling. Those who fail to see ...... the math of the price action of the markets are.

 

[SunTrader]

BTW GE currently @ $109.38 is down $255.17 from its all time high of $364.55 which works out to just about a 25% retracement.

Only 75% more to go, 23 years and counting later.

 

[SunTrader]

Think many suffer from confirmation bias. They see it work and say, look this stock did it. What's the big deal? While forgetting, more likely never "seeing", alllll the other times it doesn't.

 

[taowave]

Yawn...Wake us up when you put on your first trade....

You guys are really struggling with this concept. The problem isn't the math ..the problem is you think the math will affect price action. If a stock drops from $10 to $5 ..it only needs to rise by $5 to return to even...it does not matter what price it came from. You are applying your own personal P/L to price action...price action does not know your personal P/L

 

[Frederick Foresight]

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.

In any event, the mathematical observation is most compelling as it relates to your trading account. If you lose half your money, you will have to double it to break even. It's a lot easier to lose half your money than it is to double it. So how much of your account did you put into that losing trade where the stock price halved?

 

[wxytrader]

But simple math aggggggggggggain tells you a stock that drops from $2 to $1, needs a 100% move to make it back to $2. With me so far? Another stock that drops from $200 to $100 needs the same 100% move to make it back to original price $200

Which has a greater probability of happening? Especially in a timely manner - like oh within a calendar year. Repeat, greater probability.

OMG you can't seriously not see the flaw in your logic?? You are giving a perfect example of the traders fallacy. Which has a greater probability of happening? You aren't measuring probabilities with your simple math. That is the FALLACY! Probability of a price returning to ANY previous level is determined by ATR, and other technical factors, catalysts, fundamentals etc. It is not determined by picking some arbitrary price level and figuring out what percentage gain is needed to return to that level.

Maybe this will help.

What if the price was at $5 already? Are you saying because mathematically it needs to go up by 100% to reach $10, and only needs to drop by 50% to reach $2.50 that there is a higher probability that it will drop to $2.50? So we should toss out all TA, and all value investing, and all fundamentals and just short the market constantly because that's what the math says? LOL!

 

[wxytrader]

In any event, the mathematical observation is most compelling as it relates to your trading account. If you lose half your money, you will have to double it to break even. It's a lot easier to lose half your money than it is to double it.

NO IT ISN'T! This is so frustrating. Your portfolio will go up and down relative to the stock price. The stock price doesn't care about YOUR profit and losses. Price action is not determined by YOUR profit and losses. This is the FALLACY! You are measuring your portfolio P/L and wrongly applying that as probability of price action.

 

[hilmy83]

https://www.investopedia.com/investing/selling-a-losing-stock/

"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."​

This is complete nonsense. A stock that drops from $10 to $5 can just as easily increase back to $10. It happens all the time. The percent increase is completely irrelevant. If this was the case stocks would never channel.

You're conflating concepts. The funny thing is, your argument about price behavior is completely irrelavant to the article's points.

 

[taowave]

Did you seriously bring ATR into the discussion of a stock moving up 100% after a 50% decline???

Not only do you "not know what you dont know",you dont know what you do know...

OMG you can't seriously not see the flaw in your logic?? You are giving a perfect example of the traders fallacy. Which has a greater probability of happening? You aren't measuring probabilities with your simple math. That is the FALLACY! Probability of a price returning to ANY previous level is determined by ATR, and other technical factors, catalysts, fundamentals etc. It is not determined by picking some arbitrary price level and figuring out what percentage gain is needed to return to that level.

Maybe this will help.

What if the price was at $5 already? Are you saying because mathematically it needs to go up by 100% to reach $10, and only needs to drop by 50% to reach 2.50 that there is a higher probability that it will drop to $2.50? So we should toss out all TA, and all value investing, and all fundamentals and just short the market constantly because that's what the math says? LOL!

 

[wxytrader]

Did you seriously bring ATR into the discussion of a stock moving up 100% after a 50% decline???

Not only do you "not know what you dont know",you dont know what you do know...

Yes if there was a catalyst such as a bad earnings report etc then the price will likely not return to the previous level...but THAT is due to the bad earnings report, not due to the false mathematical burden you are placing on it. You guys are all suffering from the traders fallacy...its hilarious...and a bit concerning.