Why You Should Never 'HODL' Your Positions Up To A Certain Point
Updated
Hello Traders.
Here I give a friendly reminder to all beginners and advanced traders that holding (hodl'ing) your position is not ideal up to a certain point. The math of percentages shows that as losses get larger (compound interest), the return necessary to recover to break-even increases at a much faster rate. A loss of 10 percent necessitates an 11 percent gain to recover - and that is where it goes all downhill. Increase that loss to 20 percent and it takes a 25 percent gain to get back to break-even. A 50 percent loss requires a 100 percent gain to recover and an 80 percent loss necessitates 400 percent in gains to get back to where the investment value started.
Investors who get hit by a bear market need to be aware that it will take a while to recover, but the math of compounding returns will help the cause. Consider a bear market with a 30 percent drop in value, down to 70 percent of what the stock portfolio was worth. A 10 percent gain returns the portfolio to 77 percent. The next 10 percent recovers to 84.7 percent. Two more 10 percent gain years put the portfolio back to 102.5 percent of the value before the drop. So a 30 percent drop necessitates a 42 percent recovery, but 10 percent a year compounded for four years puts the account back into profitable territory. I will be doing a second part to this post on the idea of "DOLLAR COST AVERAGING" (DCA).
What the math of stock market losses shows best is that investors need to protect themselves against big losses as shown in the diagram above. Mental or limit based stop-loss orders to sell stocks or cryptocurrencies are there for a reason. When a certain loss level is reached, it will pay off big if the market is moving into bear market territory. Investors sometimes have trouble selling stock they like at a loss, but they will like the stock or cryptocurrency if it can be bought back at a lower price.
If you are interested in how to create the perfect trading plan, please see my previous post here:
Trade Safe.
X Force
Here I give a friendly reminder to all beginners and advanced traders that holding (hodl'ing) your position is not ideal up to a certain point. The math of percentages shows that as losses get larger (compound interest), the return necessary to recover to break-even increases at a much faster rate. A loss of 10 percent necessitates an 11 percent gain to recover - and that is where it goes all downhill. Increase that loss to 20 percent and it takes a 25 percent gain to get back to break-even. A 50 percent loss requires a 100 percent gain to recover and an 80 percent loss necessitates 400 percent in gains to get back to where the investment value started.
Investors who get hit by a bear market need to be aware that it will take a while to recover, but the math of compounding returns will help the cause. Consider a bear market with a 30 percent drop in value, down to 70 percent of what the stock portfolio was worth. A 10 percent gain returns the portfolio to 77 percent. The next 10 percent recovers to 84.7 percent. Two more 10 percent gain years put the portfolio back to 102.5 percent of the value before the drop. So a 30 percent drop necessitates a 42 percent recovery, but 10 percent a year compounded for four years puts the account back into profitable territory. I will be doing a second part to this post on the idea of "DOLLAR COST AVERAGING" (DCA).
What the math of stock market losses shows best is that investors need to protect themselves against big losses as shown in the diagram above. Mental or limit based stop-loss orders to sell stocks or cryptocurrencies are there for a reason. When a certain loss level is reached, it will pay off big if the market is moving into bear market territory. Investors sometimes have trouble selling stock they like at a loss, but they will like the stock or cryptocurrency if it can be bought back at a lower price.
If you are interested in how to create the perfect trading plan, please see my previous post here:
Trade Safe.
X Force
Note
For those who are also interested in how disciplined trading goes a long way, please have a look at this post, too!
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