You Know What? You Don't Actually Know.

Trading Psychology / Performance

You Know What? You Don’t Actually Know.

by Jonathan van Clute

• April 16, 2022

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There are a lot of stories that we carry around with us, that we tell and re-tell with total belief and confidence that what we’re saying is definitely true, definitely happened, is definitely a thing.

But we don’t know, that we don’t know, what we don’t know. For example, how many of the following did you know were true?

During the stock market crash of 1929, many stockbrokers jumped out of high-rise offices to their death.
In the 17th century, there was a speculative “tulip mania” that saw, amongst other absurdities, a single tulip bulb sell for more than the cost of an upscale mansion of the times.
The famous Salem Witch Trials in the United States, were caused by people ingesting moldy bread which contained a fungus causing effects similar to that of LSD intoxication.
A radio drama broadcast in 1938 by Orson Welles titled War of the Worlds, was believed to be a real report of alien invasion by countless people, creating panics and shock all around the country.
On November 18, 1956, Former Soviet leader Nikita Khrushchev, in a speech to the United Nations, said “We will take America without firing a shot.”
Thomas Edison tried over 1,000 experiments in order to invent the light bulb.

I’d lay odds that you probably knew most, if not all, of the above already. But here’s the thing: None of them are actually true!

I’ll include some links at the end of this article for those who want to see for themselves, but the point is that we all can easily find ourselves believing and repeating what amounts to “fake news” quite easily. And we have no idea that what we’re saying isn’t actually true. In trading, we see this all the time.

New traders especially, but not exclusively, like to repeat things that are either grossly oversimplified, or simply, mathematically, untrue.

“Price always reverts to the mean.”
“VWAP is where institutional traders will enter or exit positions.”
“Market Makers know where all the stops are.”
“You can’t time the markets.”
“Markets are always biased to the upside, so you can always average down.”
“Markets go up or down because there are more buyers than sellers, or vice versa.”

At best, there are grains of (misunderstood) truth to the above claims. At worst, they are just completely illogical, dangerous, and wrong. And yet you can see all of these things every day in the various trading groups on Facebook, or on countless Twitter feeds.

Why do these nonsensical myths/advice stick around so long if they are so demonstrably false? Well in my opinion anyway, it’s because they accomplish one (or both) of two things:

They allow the person making the claim to be lazy and not have to learn or work hard,
They absolve the person of any personal responsibility for losses. Losses are the market’s fault, not mine!

The objective facts relating to the above are more like:

Price never reverts to any average. Price creates the average, and the two will always and eventually converge.
VWAP is merely a metric by which large (generally institutional) traders are judged on how efficiently they entered/exited a position. And in fact their large volume trading will move the VWAP away from where it currently is, and towards their traded volume.
“Market Makers” the way most people mean them, are really only a thing in the stock markets. And yes, they can see things that the public can’t, are legally allowed to front-run their clients, etc. But they don’t just automatically know where your stops are, especially since your stop could be held solely on your own computer/device.
You can absolutely time “the markets” (what that means will vary person to person!) in the short term. Since today we can see real time supply and demand information (Order Flow), we can know with statistically favorable probabilities, what is most likely to happen right now, and capitalize on it.
Many markets do indeed have a bias to the upside over time, for a number of reasons. But thinking you can just average down as long as it takes, is guaranteeing a blown up account – unless you have the bank account of Elon Musk!
By definition there is a buyer for every seller, and a seller for every buyer. You can’t have “more buyers than sellers” in terms of numbers of shares/contracts/etc. This one has the largest grain of truth to it, but the way it’s usually stated shows a lack of understanding of what’s really going on and why price moves.

The point to all of this, is just to remind you not to believe everything you see/hear/read/are told just because it sounds sensible, looks to be said by a respectable source, or comes from a person you believe probably knows what they’re talking about. Do your own research, and check out claims for yourself. We live in an age where this has never been more possible, or easier. Trading is a very unforgiving endeavor, you don’t want to start out with a poorly-conceived foundation.

Until next time, good trading!

Jonathan van Clute
Community Manager, Trading Research Group

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