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Stock Trading Quick Tip: The Math that Slaughters Traders - YouTube
Channel: ClayTrader
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this topic has a very near and dear
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place in my heart it was the first topic
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that I ever covered for a YouTube video
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and we're going to revisit it with a
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slightly different spin because this is
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a simple yet very disastrous topic and
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area for market traders if they're not
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aware of it
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hey it's clay trader at clay trader calm
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as I said in the introduction I've
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actually covered this video before but I
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want to now approach it with a little
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bit different spin and total shout-out
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goes to you YouTube people as I got a
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comment on this and it was one of those
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things where wow that's actually
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summarizes this perfectly why didn't I
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think of that the first time so I want
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to revisit it but before we go any
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further let's start things off with the
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question so my question to you is if
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your position price so position that
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could be a stock it could be a bond it
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could be an option it could be anything
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this is just math here but if you're in
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a position and the price drops 50% so
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you lose half of its value the price
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then needs to rise by 50% in order to
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hit break-even so your position has lost
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half its value now it needs to go back
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up that same value 50% so is this true
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or is this false and be honest so again
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your position price drops by 50% in
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order to need in order to get back up to
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break-even and need to then rise by 50%
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well let's take a look at this so here
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is going to represent the trade and just
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to make the math easy let's say that you
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bought in at $10 not trying to insult
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anybody's intelligence but a 50% drop so
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50% here is going to make that value
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half of 10 right so there's five again I
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don't want to insult anybody's
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intelligence but actually just really
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shows how tricky this all can be so the
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premise okay and it will not need to
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rise by 50% in order to get back up to
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break-even which would be 10 obviously
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you got it at 10 so that's your
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break-even point so let's go through the
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math on the flip side it needs to rise
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by 10 or if it rises by 50% oh wait a
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second well when 5 what's 50% of 5 when
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it rises back upwards $7.50 and this is
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a 50% rise however what has changed in
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the math here well now we're taking our
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base point from here so a 50% increase
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only gets you to 7 dollars and 50 cents
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in other words you still got another
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half
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got another chunk of this triangle to go
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or not triangle this rectangle to go
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before your back to break-even again ten
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to five is a 50% drop but if it rises by
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50% you're not at breakeven you're only
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half way there you're only at 750
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because in order to get to break-even
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the actual move needs to be what and
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needs to move up a hundred percent so a
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50% drop in order to compensate for it
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you then need the price to go a hundred
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percent in your favor
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a lot of people are not aware of this
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math and it can get you in trouble in a
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hurry especially if you start averaging
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down and averaging down you don't you
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know a lot of people don't realize this
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math is working against you so no people
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out there that are advising just keep
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averaging down or any sort of strategy
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that just says just keep averaging down
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keep averaging down this math is totally
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working against you the further in the
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hole you go you're literally mathematics
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you know this is not my opinion this is
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how the math works it's getting more and
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more difficult to go out of the hole so
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again that's all I have to say but just
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to summarize it like I said very simple
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but it's not simple and that's why it's
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tricky 10 - 5 is a 50% drop so a lot of
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people and you know if I were to look at
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that question I'd say yeah it drops 50%
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it needs to go up 50% and you're at
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breakeven but when you base it off of
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the numbers well from 5 what is 50%
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going upwards well that only gets did a
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$7.50 and you want to get up to 10 to be
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breakeven so be aware of this math as
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you're trading and you know if you've
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ever wondered man this averaging down it
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always seems so much more difficult to
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get you know back up to where I need to
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be well that's because the math is
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actually working against you so
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definitely keep that in mind as you go
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out there and implement your trade
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systems and trade strategies if any
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other questions on this topic please
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leave those comments below if you want
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to see the very first video I did on
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this I call it the math trap you can
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click on the link that's popping up on
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your screen right now and you can go
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back like I said that was the very first
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video I ever did for YouTube in terms of
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you know me getting in front of the
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chalkboard because it is such a powerful
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concept and one that is it's almost so
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obvious that it hides right right in
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front of you because it seems obvious
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but it's just not again leave any
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comments questions below also click the
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like button if you're watching this on
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my site
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please click the share button I know
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little things like that little clicks of
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the mouse go a long way thanks for
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watching get out there and trade without
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emotion
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