Why Do Over 90% Of Traders Lose?
You’ve got to ask the question “Why do over 90% of market traders make losing trades most of the time?”.
The answer is this. Despite being trained to follow signals, your average trader trades on emotion in the form of fear and greed. They are swayed by hype and react on news. We all know that when it comes to the markets, news is always too late, yet the hype which comes with news causes the majority of players to jump on and off the bandwagon without stopping to think (or look) first.
These market players (the ‘crowd’), are part of the near 95% or so who lose money consistently. They are commonly referred to as the “dumb money”. The remaining 5% is made up of, well I’m sure you guessed it, the “smart money”.
The smart money knows that for a stock to make it to the front of the news there are a lot of influences at play, most of which have a vested interest in its movement. When stocks are being hyped up to buy the smart money assumes there is some entity out there preparing to offload a relatively large quantity.
Similarly when stocks are being hyped down to sell, the smart money assumes there is some entity out there preparing to buy up a relatively large quantity.
By assuming this the smart money positions itself to buy up stock from hyped down sellers just as it heads north, and sell the stock to hyped up buyers just as it heads south. This is contrarian trading, doing the opposite of what the crowd is doing.
The dumb money acts with a crowd mentality and the smart money capitalizes on that ruthlessly.
In other words to profit trading in the markets you must be in the 5% who do the opposite to whatever is driving the 95% who are holding losses.
Logically, the smart money is buying when stocks have bottomed and selling when stocks have topped. The dumb money on the other hand buys when stock prices are reaching a top and sell when the prices reach a bottom.
They buy high and sell low and they do this almost all of the time because of hype.
For example, they hear on the news a stock has been doing really well because it has risen 30% in the last few months, so they rush out and buy it. The fact that if the stock has risen 30% in the last few months and is being hyped up to buy, it usually means the stock is due for a pull back, and pull back it usually does.
After a few weeks of watching their investment dwindle they hear on the news that the stock is having problems because it has dropped 20% in the last few weeks, so they rush out and dump it.
When they bought after hearing the hype in the first place, when the stock was at the top of its 30% run up, there were plenty of sellers. Who were those sellers?
When they sold after hearing the hype in the second place, when the stock had dropped 20%, there were plenty of buyers. Who were those buyers?
The answer to both questions is of course, the smart money.
If the idea is to emulate the smart money or the dumb money, it’s pretty obvious which one we should choose.