Why You Should Never Hold on to Your Positions Beyond a Certain Good day, traders.
I'd like to use this opportunity to advise both new and experienced traders alike that holding (hodling) your position is not recommended beyond a certain point. According to percentage calculations, the return required to recover to break-even increases at a considerably faster pace when losses grow in size (due to compound interest). It goes downward after a loss of 10% because a gain of 11% is required to make up for it.When the loss is 20%, it takes a 25% gain to make up the difference and return to break-even. To recoup from a 50% loss, a 100% gain is needed, and to reach the initial investment value after an 80% loss, a 400% gain is needed.
Investors who experience a bear market must understand that it will take some time to recover, but compounding returns will aid in the process. Think about a bear market where the value drops by 30% and the stock portfolio is only worth 70% of what it was. The portfolio increases by 10% to reach 77%. The subsequent 10% increases to 84.7%. The portfolio reached its pre-drop value of 102.5 percent after two further years of 10 percent gains. Consequently, a 30 percent decline requires a 42 percent recovery, but a four-year compounding rate of 10 percent returns the account to profitability.I will be doing a second part to this post on the idea of "DOLLAR COST AVERAGING" (DCA).
The math behind stock market losses clearly demonstrates the need for investors to take precautions against significant losses, as depicted in the graphic above. Stop-loss orders to sell stocks or cryptocurrencies that are mental or limit-based exist for a reason. If the market is headed towards a bear market, it will start to pay off once a particular loss threshold is reached. Investors occasionally struggle to sell stocks they enjoy at a loss, but if they can repurchase the stock or cryptocurrency at a lesser cost, they will like it.
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