The stock market is full of saying and rules and themes. If you consider every single one of them worthless you will be on solid ground. The industry lives off people trading and broadly on people losing their money doing so. Don’t be gulled, advice is often to help the adviser not the advised. Here are three examples where the Quack Doctors of the stock market peddle their wares for their own benefit.
Trading psychology.
There are no trading psychologies that will make you money. There are only trading psychologies that will slow or speed your rate of loss. The market does not have a psychology in the same way as gravity does not have one. You step off a cliff, you fall, there is no psychology to effect the result. There is only one psychology to stop you losing money, the one that says do not trade. If you want to make money looking at your ‘mindset’ will not help you. All the sizzling aphorisms will not help you. When you read a bullish saying forget it, making money in the market is not about your strength of character, your gut or your mental balance.
So a trading legend like Jesse Livermore says “the human side of every person is the greatest enemy of the average investor or speculator” and you think how wise and you read their other sage views and you think I need to absorb that into my way of thinking to win at trading, remember that this legend shot himself because of his trading losses.
Traders lose money because the market is random. This means they are trading randomly. Which means that the chance of profit are 50/50, which in turns they made no money. Sadly the act of trading costs, so their loses are their trading costs multiplied by the number of trades made. It is that simple. No amount of psychology can make any difference to that end result it is only the number of trades made and therefore the velocity of those losses that is effected by psychology.
Bear market Bull
When a market falls 20% it does not enter bear market territory. When it rises 20% it does not enter a bull market territory. When a market rises or falls a certain percentage is does not enter any kind of market bull or bear at all. These statements have no value and if you trade on them you will lose on average your trading costs and this will contribute to your ‘bleed to zero’ from trading. One good piece of information gleanable from these statements is that people who use these phrases do not know what they are talking about and can be discounted. Another shortcut to saying your oxygen on paying attention to noise is discounting anyone using the neologism x times less. Eg the level of their IQ is 20 times less. It is not necessarily a surprise that commentary on important issues comes from non-experts but I digress. Bull or Bear or any useful categorization must be a tendency not a static state to be useful, it must predict tomorrow. That was the original purpose of bull/bear as a guiding description of trend. The trend begins with no move at all and continues on its way till its end. The only thing you need to know to trade is direction and the market being random that is incredibly difficult, especially as the time frame shrinks.
The market is not perfectly random, but it is very, very, so very my word processor wants to correct my sentence, random that while spotting the moments when it is not random is very difficult to do indeed and is mainly restricted to the long term. This long term is where Bull/Bear definitions come into play because those tiny non-random element builds up to be significant (and more than your trading costs) over long periods. This is why, investors who are in effect are very long term traders fly in private jets and traders often end up in orange jumpsuits.
The reason you lose money is blah, blah….
The is only one reason you lose money in the market. It is because you trade. The market is extremely random and the only way to make money is to be trading non-random events. If you don’t believe me that the market is random, simply download any time series of the S&P 500 and over any time frame you like try and find a robotic method to buy and sell and overtime make money. You will spend a lot of time coming up with a few convoluted way and if the difficulty of finding those opportunities doesn’t convince you the market is highly random, though it will, you will note that the profit from that technique will not stretch far into the future. This is what some of the cleverest minds have been trying to do since before even I was born. That legion is what drives the market to be random from period to period. It is only in times of non-random behavior that a trader can make money. There are times when the market will broadly pay you to buy or sell to help it price accurately, such as this Crash of 2020, but for most of the time there is no everyday opportunity to trade non-randomly.
If you are investing, you are trading the long term non-randomness of what used to be called ‘progress.’ You should capture the 7% yield on that over a long time period if you diversify your risk. This is exactly why the index EFT market grows and grows, because as it makes its holders money, more money gravitates to it. Trading on the other hand eats its children and keep the audience small.
If you trade randomly so that your trading costs are more than the yearly expected return of capital in that market, you will lose money. All other factors only attenuate that waveform. If you trade/invest at a lower cost than the long-term return of that market you will make money.
The coming months will have many non-random events which will offer tremendous trading opportunities, but these will die down as normality resumes. Traders that identify non-random market situations and trade them will make money, those that buy and sell because they think its going up or down will continue to bleed their capital away.
It remains the case that all you need to know is whether the markets is going up or down and that remains an incredibly hard thing to do.