The chart below is quite interesting, and also quite harsh.
Many people believe that losses and profits are symmetrical,
but the reality is quite the opposite. Losses are not linear, and recovering losses is exponentially difficult.
The deeper the fall, the more it's not a matter of effort anymore; it's a matter of percentages—the numbers aren't on your side.
As shown in the chart, a stop-loss of -20% or less generally offers the best return. A -30% drop requires a 43% rebound; the greater the drop, the higher the percentage rebound.
There's an even more interesting comparison.
Suppose you have 1 million, and there are two profit paths:
1. 5% compound interest annually for 3 consecutive years.
2. +50% in the first year, +50% in the second year, -50% in the third year.
The second seems more exciting, but careful calculation reveals that
the path of a steady 5% return actually yields more in the end.
Often, what truly differentiates us is
who earns the most, but who avoids a fatal drawdown.
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