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OMG I can't believe this fallacy still exists in trading!
- Thread starter wxytrader
- Start date
What vol are you using before and after??
That would be an external factor. There are a lot of things that can affect price action as mentioned. We are just talking about the claim that if a stock drops from $10 to $5 then it has only dropped 50%, therefore it will be harder to recover your losses because the stock needs to increase by 100% just to break even. This is a fallacy.
That is the fallacy that the cost can be recovered, even though the project/business is failing.The stock will just as easily go up $5 as it dropped $5...the math doesn't matter.
That is the fallacy that the cost can be recovered, even though the project/business is failing.
You think stocks move based on fundamentals?
Is there less of a probability of it returning to $10 than there was for it to drop to $5?
YES
You think stocks move based on fundamentals?
YES
YES
YES
Wrong and wrong. You are suffering from both traders fallacy, AND believing that stocks move based on fundamentals.
Theoretically then, according to you, it is statistically more probable that a stock price will not reach its previous highs after dropping. If we continue this logic then the stock market would be in a perpetual downtrend...trading ranges would not exist, channels would not exist, triangles would not exist, double bottoms, triple bottoms, breakouts, the entirety of elliott wave theory, support & resistance levels, pullbacks, Gartley cyphers, value investing would not exist, buying low and selling higher would be a statistical impossibility over time. All of these things happen all of the time and all of them require a stock return to previous highs.
AND every portfolio that held a stock during any of these common phenomenon would have recovered all losses.
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No, you are wrong on both counts.If we continue this logic then the stock market would be in a perpetual downtrend.
A company grows revenue and earnings quarter after quarter. The company becomes larger and more valuable. The stock price goes up. That's called fundamentals...
Put 500 stocks like that in an index... the index rises.
Perpetual downtrend???!!!
That makes zero sense.
How are old are you?
You are obviously trading bs stocks like Gamestop, or AMC.
What you are describing is what external factors would affect the price action of each stock, and what is the probability of those external factors resulting in the price recovering. Well that would depend entirely on the external factors.
"Every object will remain at rest or in uniform motion in a straight line unless compelled to change its state by the action of an external force."
- Newton
Applied to markets, a trend in place will need an external force - greater than the current one - to change its direction.
Using your logic - of a stock going down will always go down, a stock going up will only go up.
Since they don't, obbbbviously external forces change are needed for the trajectory to reverse.
So .... for a $50 stock that was once $100 it will need a lot more of the external forces to return to the prior level than a $1 stock to return to $2.
Does it happen (for some stocks that don't completely crash and burn), of course. Again, is it as likely and take place just as quickly? Nah uh.
Theoretically then, according to you, it is statistically more probable that a stock price will not reach its previous highs after dropping. If we continue this logic then the stock market would be in a perpetual downtrend...
I didn't say it would NEVER reach its old highs.... there's a factor here called time.
Pull up a 15 chart of Chipotles. Look for the ecoli scare. Big drop. It recovered, and it has been doing pretty well since then. Why? The model works, they add stores, revenues grow, earnings grow. ---> Fundamentals. That's why it went from $41 to $2000