Extended Text Plan: Decrease Always Occurs Faster Than Growth
1. Introduction: Asymmetry in Market Movements
1.1 Statistics of Declines and Recoveries
Over the last 50 years, the S&P 500 has fallen by 20% or more 22 times, with a full recovery cycle averaging 2.7 years. For the tech sector, the Nasdaq has experienced declines of 30% on 18 occasions, with recovery lasting 3.1 years.
2. Risk Metrics and Drawdown
2.1 Sharpe vs Sortino Ratio Calculation
The Sharpe ratio is calculated as (Rp − Rf)/σp, where Rp is the portfolio return, Rf is the risk-free rate, and σp is the standard deviation. The Sortino ratio is calculated as (Rp − Rf)/σd, where σd is the deviation of only negative returns. For instance, the "buy & hold" strategy of the S&P 500 from 2000 to 2020 yielded a Sharpe ratio of 0.45 and a Sortino ratio of 0.78, indicating a high degree of asymmetry.
2.2 Max Drawdown and ATR
Max DD is calculated as max(peak − trough)/peak. For the "60/40" strategy, the max drawdown was −31% in 2008. The ATR(14) for the SPY at the peak of volatility in March 2020 was approximately 5%, which is 400% higher than the average from 2010-2019.
3. Risk Management and Capital Protection
3.1 Case Study on Stop-Loss Calculation
Using the example of purchasing AAPL at $150 with a desired risk of 1% of a $1,000 capital, the position size would be calculated as $1,000/($150 × 0.1) = 66 shares. A stop-loss is set at $135 (10% below), limiting the loss to 1% of the portfolio.
3.2 Hedging with Put Options
Purchasing an at-the-money (ATM) put option on SPY with a three-month expiration and a delta of -0.4 allows for the protection of 40% of the position in the event of a decline below the strike. The cost of this insurance is approximately 2% of the portfolio.
4. Psychology of Losses and Emotional Traps
4.1 Results from AAII and Gallup
According to the AAII Sentiment Survey, the percentage of bears exceeded 50% in 80% of deep corrections. Gallup findings show that 65% of retail investors experience stress during declines greater than 10%.
4.2 Overcoming Cognitive Biases
Maintaining a trading journal reduces attachment to losses, while pre-established entry and exit rules help minimize panic selling.
5. Strategies Considering Asymmetry
5.1 Counter-Trend Bounce Strategies
Conditions: RSI < 30, price has reached a support level, volume > 50-day SMA. A backtest from 2010 to 2020 showed an average return of 12% annually.
5.2 Short Only During Rising Volatility
Utilizing VIX > 25 as a trigger for opening short positions on ETFs during corrections; average P/L is −15% for the first month of correction.
5.3 Long Only with Filters
Only stocks with a beta ratio < 0.8 and a profit factor of 1.8 for the period from 2015 to 2025.
6. Algorithmic Adaptation
6.1 Example MQL Code for Stop on Drawdown
if(AccountEquity()6.2 Script for Monitoring Drawdown in Pine
dd = (close - highest(close, 50)) / highest(close, 50) plot(dd*100, title="Drawdown %", color=dd<0?color.red:color.green)7. Practical Cases and Historical Examples
7.1 Detailed Analysis of the 2008-2009 Crisis
Between October 2007 and March 2009, the S&P 500 fell by 57.7%, with the recovery to prior peaks taking 4.6 years.
7.2 COVID-19 V-Shaped Recovery
The SPY dropped by 34% in 22 trading days and recovered to pre-crash levels within 126 days, marking the second-fastest V-shaped recovery since 1987.
7.3 Tech Sector 2022-2023
The Nasdaq Composite lost 33% in 2022, regaining 90% of the decline by December 2023, demonstrating a mixed V/U-shaped recovery pattern.
8. Regulation and VAR Limits Requirements
8.1 VAR Limits for Funds
European regulators require VAR (99%, 1 day) ≤ 20% NAV. For hedge funds in the U.S., the SEC recommends VAR ≤ 15% NAV.
8.2 Margin Requirements Restrictions
The initial margin for S&P 500 futures is set at 5-6%, while the maintenance margin is at 3-4%, amplifying the effects of forced liquidation during sharp declines.
9. Fundamental and Macroeconomic Influences
9.1 The Role of the Fed and Interest Rates
Decisions by the Fed to tighten policies led to an average drawdown of 12% within six months following an interest rate increase from 1% to 3%.
9.2 Geopolitical Shocks
The imposition of an oil embargo in 1973 triggered a decline of −45% in the oil sector over three months.
10. Conclusion: Leveraging Asymmetry in Strategies
The asymmetry of declines and recoveries is crucial for developing strategies that are resilient to risk. By combining advanced risk management, psychological techniques, and algorithmic filters, investors and traders can protect capital during rapid downturns and utilize slow pullbacks for growth. VAR regulation and insights from historical cases enhance the reliability of strategies across various market conditions.
