In my more than 20 years as a professional institutional trader, I have seen retail investors and traders make many mistakes that cost their portfolios big. Working with some of the biggest hedge funds and money managers on Wall Street, all of which exceed more than $1 billion in managed assets, I’ve gained a wealth of knowledge and understanding of what really moves the market—and it’s not what most people tend to think it is.
So, I wanted to outline, based on my experience and observations, these common misconceptions that have somehow become so deeply entrenched in the minds of the majority of traders in the market today.
Here are the seven most common:
Number One: Watching TV Won’t Make You Money
Retail traders think that market moves are due to the what the Financial News is attributing them to.
In my not-so-humble opinion, 99% of market moves have nothing to do with what the media is talking about or attributing them too. It is important to remember that the business model of most modern media is entertainment, not journalism. If you want to be a successful trader, it is important that you learn to think for yourself.
I can assure you that there aren’t institutional traders who are watching the news and yelling ‘Buy!’ or ‘Sell!’ based on news headlines. Two recent examples of Fake Financial News are the hysteria that surrounded trade wars and devaluation of the Turkish Lira. If you follow the markets, you know that these have been two very popular news stories over the past few weeks.
The media was going into hysteria with news of the trade wars on July 6. I did a quick Google search and found some notable headlines from that day:
Welcome to Your Trade War, World. It could get even uglier, so hang on tight – Bloomberg
How the ‘Biggest Trade War in Economic History’ Is Playing Out – New York Times
Trade War begins: US and China exchange $34 billion in tariffs – CNBC
‘We are forced to retaliate,’ China says after Trump’s tariffs take effect – Chicago Tribune
China trade war hits agriculture harder starting July 6 – Feedstuffs
Fortunately, civilization did not collapse and just a month later we were faced with another economic calamity…the devaluation of the Turkish Lira. Here are some headlines from when this story hit the news on August 18th:
Turkish Lira ‘Currency Crisis’ Not Over, Could Hit 8 Against U.S. Dollar – Forbes
Could Turkey’s financial crisis have a snowball effect on world markets? – Washington Post
Stocks falter as lira wobbles – City Index
Currency market turmoil, trade tension to sway market during the week ahead – Economic Times
Turkey lira crisis: Six things you need to know – Al Jazerra
So…both of those stories sound pretty bad. People in the news media are experts on these matters so we should assume they know what they are talking about (not!). Take a look at this chart…it is the S&P 500 ETF (
Now take a look at this chart. I have these two important days identified. Clearly, Mr. Market disagreed with the Fake News that was being reported. As you can see, the market was in reality strong on these two ‘terrible’ days. This is a perfect example of how the media typically gets it wrong and why you should always be skeptical about the news that is being reported.
Number Two: Trendlines Trump Headlines
Retail traders do not understand the dynamics that typically move the markets.
The main thing that drives market moves are the underlying trends that are occurring and how markets react when they reach levels that are important. For example, suppose a market has traded down to a level that is an important support level and becomes very oversold. The odds are that it will bounce off of this level. The Fake News Financial Media will attribute this move to whatever the news story of the day is.
Conversely, if the markets sell off because they are overbought and reach important resistance, the media will attribute this move to whatever the news story of that day is. In reality, the markets would have reacted in these ways regardless of what the news headlines were on that day. They are moving due to the supply and demand dynamics in the markets…not because of the headlines.
Number Three: Sometimes It Really Is Just Noise
Retail traders do not understand that markets sometimes move due to ‘noise’, and that there are some days that are important, and some days that are not important with regards to market action.
Markets also move due to ‘noise’. Consider the following situation. A client of a mutual fund wants to withdraw $100,000. The traders at the mutual fund need to sell a basket of stocks that is worth $100,000 to raise the cash for this withdrawal. On the same day, a different client deposits $200,000 into the same fund. The traders now need to invest these funds and literally buy a basket of the same stocks that they are selling. If they have time constraints, such as needing to complete the trades by the end of the day, then these stocks will rise in price. Consider that this happens hundreds if not thousands of times a day at various firms across the world and you can understand how this will impact the markets. This move has nothing to do with whatever the media is attributing it to.
With regards to market action and what it might mean for the future, there days that are important and days that are not important. Important days are days when important support or resistance levels are broken. Reversal days are also important. These are days where the markets make a large move during the day only to revert and close at or beyond their opening prices…higher than the open during a buy reversal and lower than the open for a sell reversal. Days with capitulation volume are important as well. These are days that have very large amounts of volume traded that occur at the very end of a downtrend. This large volume could mean that the sellers that have been driving the market lower are completing their orders. Unimportant days are days when markets trade sideways and no important technical dynamics come into play.
Number Four: What Really Separates the Best from the Rest
Retail traders think that great institutional traders and hedge fund managers have the Holy Grail…an infallible secret method
As someone who has traded directly for two of the best money managers in the history of the industry – Mario Gabelli and Steve Cohen – I can tell you unequivocally that this is not true. These systems just do not exist. There have been examples of methods that are exceptionally profitable, but they have short lifespans because they invite competition. It usually surprises retail traders to find out that the best institutional traders are correct ‘only’ 58% of the time. What makes them successful is that they let the winners run and they are quick to close out of their losers. Successful traders understand that the real ‘Holy Grail’ to successful trading is risk management strategies and proper investment psychology.
Number Five: Consider Your Downside as Much as Your Upside
Retail traders don’t think about or understand risk management and investment psychology.
Successful traders understand that people have not evolved in a way that is conducive for managing money. Entering a trade causes traders to be fearful of either taking a loss or missing out on a profit. This fear triggers an adrenaline rush and a ‘fight or flight’ response. This, in turn, causes traders to close out of their winners too soon and to hold onto their losers for too long. The reason why quantitative strategies are successful is because they don’t have emotions. Successful traders have an awareness and understanding of investment psychology. Successful traders understand risk and utilize risk management strategies.
Number Six: If You Don’t Have an Exit Strategy, Get One
Retail traders think that what they buy is more important than knowing how to sell it.
Successful traders have rules. They don’t trade off tips from their buddies. When successful traders enter positions, they know where they are going to be stopped out and where they will take profits. You should not enter a trade unless you know where and how you will get out of it! This is the most important rule of successful trading. Not having an exit plan causes traders to succumb to their emotions and act illogically. Unsuccessful traders typically love to talk about the latest position they entered but they do not consider how they will get out of the position. They think that what they buy is more important than knowing how to get out of it. They are wrong.
Number Seven: Don’t Waste Your Time and Profits on a Fool’s Errand
Retail traders try to catch the exact bottom or top.
This desire to get the exact bottom or top is driven more by the emotional need to prove one is smart than it is by logic. If you do not have a plan, you are just guessing and will most probably get run over. Go to the casino instead…at least you can get free drinks. Successful traders have plans and rules that will define how they enter and exit trades. The don’t just guess that it is time to get in. It is not logical to enter trades without a definable reason.
Conclusion & Solution
If you are a retail trader that is looking to improve, the most important thing to understand is that humans have not evolved in a way that is good for trading and to have an awareness of how this will affect your decision making. Trading triggers a ‘fight or flight’ response. Adrenaline may be a good thing if you are hunting Woolly Mammoths, but it causes people to make errors when they are trading. If you have well-defined rules you will be far less likely to commit these errors.
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