I get this question pops up a lot, and it seems like some folks aren't really clear on it. Let’s break it down using coin W, which starts at $1.
So, coin W jumps from $1 to $10, but then it crashes back down to $1, looking like a total dud.
If you went long on coin W at $1 and invested $100, you would’ve made $900 when it hit $10. But if you flipped to a short position with that same $100 when it was at $10, and then the price dropped back to $1, your profit ends up being less than $90.
What do you think causes this difference?
In this task, there is no amount for which a short was opened for the W coin. But taking into account that the profit was $250, I can assume that it was for $250 that the short was opened. And this is explained by the fact that when opening a short, the profit cannot be more than the amount for which the short was opened.
I have edited it to the right amount which is $90 that the person would have made when the coin fell back to $1 from 10. That is if the person open short position.
I have also edited the $1000 for the long position to $900 which is more accurate than $1000 for the PnL.
You are right that you can not make 100% ROI of your money in short position.
I remember asking a similar question about 4 years back, and I got some pretty useful responses in the thread, and I learned something new ---> longing vs Shorting, Why is there a huge difference in percentage ROI?
I had a bit of mathematical confusion, and this answer helped me see the light. Perhaps it might help someone else
$1 to $10 is 900% increase, $10 to $1 is 90% decrease. By shorting you have infinite loss potential because price can infinitely go up while long could only give you 100% drawdown.
One of the reasons why some people only long and prevent themselves from shorting anything.
The reason is basically the difference between percentage move and base price. Going from $1 to $10 means a 900% gain meaning the coin has increased 10x. But going from $10 to $1 again technically means a 90% drop not 900%. So many people think that if they return to where they started the short side will also make the same profit but in reality that is not the case. Even if you use the same $100 margin the return on a long position is much larger because the entry price was very low. And on the short side the entry was at $10 so the downside percentage is limited. That is why it is important to understand percentage movement leverage and risk management in trading not just looking at the price.
I understood what you wanted to write about, even though you stated your thought incorrectly. This means that when opening a long, the profit can increase indefinitely, while the short is limited to a 100% loss. Did I understand you correctly?
No, short could give infinite loss potential because the price can go up infinitely. If you shorted an asset at $1 for you to make profit the asset need to go below $1 and the maximum profit you can get is when the price becomes 0 which is 100%. But the potential loss for shorting can be infinite theoretically because an asset could go way past $1 infinitely e.g $10, $100, $1000, $10000. That's why trading firm sometime limit exposure to short or never short at all.
When you are creating a long you can get infinite profit potential because price can theoretically go infinitely up while you could only lose 100% because whatever the price you entried at, be it $1 or $100000 when it goes to 0 it have 100% drawdown because there is no such thing as negative price.
As per checking it seems its a revenge trade because imagine you ended up lossing with the $900 capital and then ended up for $100 but if you take an analysis base on my experience is I will just capable to make a lose with around 10-30% of the capital so .
$900 x 0.30 = 270$ that im willing to lose instead with that is its return a $100 only so basically there is no stop loss happens here and the rest is just whatever will be the result so ended up burn all of the capital instead having a partition of cut losses. Better make a confirmation first before taking a position, not just out of eagerness to win back.