Properly Thinking Your Investments

As you can see in the chart below, for a couple years the stock market was in a big sideways range. Notice price spent much more time near the top of that range than the bottom. This means most investors that invested into that market during that two-year period paid prices near the high of the range, not the low. The average investor who parked his or her money in the stock market didn’t see any long-term capital appreciation over that period, not until price moved higher from that range later last year.

What about some of the major institutions like Goldman and others; did they have flat returns over that period? Many recorded record, very strong profits. If you think about it however, the institutions are buying and selling in the same markets during the same period as average investors, yet they are making all the money.

What about short term trading? It’s no secret most retail day traders lose money. Yet many major institutions buying and selling in the exact same market as the day traders are making fortunes consistently. For an individual to find success short term or long term from the financial markets, the most important thing they can do is so simple, yet most don’t realize it. I tell them they need to stop thinking like an investor and start thinking and trading like a financial institution or bank and that is the focus of this piece.

It’s very simple, the average investor makes decisions to invest based on time and fundamental health of a stock or economy, not on price. Meaning, they invest their hard-earned money in the market as soon as they can or on the 1st and 15th of every month if they are in a 401K program in the USA. In addition, if the average investor thinks a company is “good”, they are comfortable buying the stock. The professional investor/trader doesn’t think like that at all. They focus on one thing and one thing only, PRICE. I learned this many years ago when I worked on the professional side of the business on the trading floor of the Chicago Mercantile Exchange.

SPY Weekly Chart (S&P)

For the equity index markets (stock market), I choose to have the same position on most of the time that has me always focus on price and benefit from a market that is designed to go up over time. Most months, it’s a simple options position that has me selling puts below demand zones.

Above is the last position I was in for April, which achieved maximum profit, and next to that is a position I am currently in, short the SPY 227 June Puts. I entered the current position last week when market price was DOWN as that gave me a much better price. Like Wall Street, I only care about what price I am buying and selling at in the markets, not dates or time or news. As long as price remains above 227, the position will be fine. What you need to realize is that there is someone on the other side of all these trades who thinks the market is going to fall below fresh demand zones each month in the equity index markets. And while there are market declines, the chances of price moving below a fresh demand zone the first time it returns to it is so slim yet people take on that position each month and lose over and over. Perhaps they are simply buying insurance on a portfolio, which is smart. In that case, I am happy to be the one selling them that insurance.

Again, there is a big difference between how a retail trader and investor thinks and executes vs. the professional. The retail investor world blames institutions for investors’ lack of performance, but is it really their fault? They are in the business to make money for themselves first and foremost and we can’t fault them for that, they are accountable to shareholders, not clients. I am in no way trying to defend one group or the other but instead, trying to shed light on a heated topic that is very much misunderstood. For example, when an investment bank gives a report on a company stating the company has good earnings, a healthy balance sheet, strong management and the stock is in a strong uptrend and is expected to achieve stronger earnings in the future, are they saying anything that is not true? Most of the time that information is correct; however, the average retail investor takes that information as a buy signal and buys into the market with no regard for price. Did the financial institution tell you to buy in this example? No…

I do have an unfair advantage, as I started not as a retail market speculator but on the institution side of the business. I got to see exactly how institutions operate, where exactly they buy and sell and why, and what this looks like on a price chart. I am very aware of how little the mass group of average traders and investors actually understands about how money is really made and lost in markets which is one of the main reasons I write these articles.

If you are struggling with your trading or investment capital, it is likely because your mind and financial plan is still at the retail level. What you need to do is start thinking and executing like a professional. If you have any questions about achieving your financial goals or about the strategy I talked about in this article, email me and I will try and help.

Hope this was helpful, have a great day.

Learn to Trade Now

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