We’ve all experienced losing trades and wondered if we should hang on to the position for a little longer or cut it loose. So, to help answer the question, we studied the short-term performance of stocks and ETFs after prices declined by different magnitudes.

How long does it take a stock to get back to even after a large daily move down? And does the magnitude impact how long it takes the position to recover the loss?

We believe this research can have a real impact and help you make smarter trades. The analysis is highly illuminating, and the lessons presented in this show are truly actionable for your trading right now.

Loss recovery probabilities

We analyzed 324 highly liquid tickers from March 2002 until March 2022. This enabled us to observe price action for many popular stocks and ETFs to determine how these positions reacted to different drawdowns over the following days.

We want to know: how many days does it take to recover a loss when a security lost a certain % amount?

‍The tables below show the percentage of daily losses and the probability the loss was recovered within ‘n’ days. For example, looking at all the tickers in the study, if the security was down between 0 - 0.5% in a single trading day, there is a 92% chance the loss was recovered in one day (the day after the price dropped).

We looked at the daily loss percentage, then tracked each ticker’s price to find when it recovered its dollar loss. For example, if a $100 stock lost 1% to $99, it would need to gain $1 to reach the initial price.

Key takeaways

Most price recovery happened within the first five trading days. The more price drops, the lower the probability that the loss is recovered at any point, which makes sense. The longer you held the position, the more likely you were to recover the loss. Assets tend to continue their momentum and retrace toward the origin price.

Magnitude matters

Remember, if any ticker dropped 0 to 0.5% in one day, it recovered its loss the next day 92% of the time. However, increasing the daily loss to .5 - 1.0% reduced the one-day recovery to only 78%.

The more price declined, the lower the chance of recovery within a day. On significant down days, the likelihood that you’ll get back all you lost at any point is statistically low.

Holding period matters too

Larger daily drawdowns saw a higher recovery of losses at a better rate over time.

The chance of recovering the position on day one is very low. But, holding on to that position longer improves probabilities dramatically. In fact, every daily loss range improved its averages the longer the position was held. Each holding period length improved the chance of price recovery (holding five days was always better than holding four days; holding four days was always better than holding three days, etc).

For example:

• 0.5 - 1.0% was 78% (1day) vs. 90% (5day) = 15% improvement

• 4.5 - 5.0% was 22% (1day) vs. 54% (5day) = 145% improvement

Don’t miss: Podcast 227 explores the pervasiveness of extending upward momentum and reversing negative momentum in stocks relative to their moving averages.

Stocks vs. ETFs 

Stocks more easily recovered their losses during a 5-day period than ETFs for every category tested. ETFs recovered losses at a lower rate, and when ETFs had bigger moves, they were less likely to recover.

For example, on a 1 - 1.5% loss, stocks recovered the drawdown 84% of the time within 5 days versus only 75% for ETFs.

How to apply this research

As an options trader, if you’re challenged position expires in one day and the underlying price had an intraday loss of 0 - 0.5%, you may consider holding overnight instead of exiting the position, knowing that tickers statistically recover their loss 92% of the time during the next trading day.

If your bullish position’s underlying security drops and you're 10 days from expiration, holding for another five days statistically improves the likelihood of regaining more of the loss compared to exiting any of the first four days after the daily loss.

Stocks typically have more volatility than ETFs, which track a basket of securities. This increased volatility may be the reason they tend to recover more of their daily losses, as stock prices are more likely to fluctuate higher and lower compared to ETFs. Plus, volatility clustering means volatile periods beget more volatility.

You can easily create custom watchlists in your automations to focus on specific tickers in different market environments. You can even manage stocks and ETFs separately with a simple decision recipe.

If your bot trades ETFs, you might be more willing to hedge that position on a big move down since they recover less of the decline. Conversely, if a stock has a single-day loss, you may consider being more patient in the days following the drop.