Financial Markets
The Market’s Big Lie
How we’ve all been fooled by Wall Street.
The rise of Dogecoin, GameStop, AMC, and other ‘meme stocks’ is not unusual in the financial world. But a global quarantine, rampant use of social media, and financial democratization through easy-to-use apps have made these assets household names.
In many ways, this is favorable — what we have witnessed in the last decade is nothing short of a revolution. The world of high finance has made its way to the people.
They are more aware of the ongoings in this world than ever before, and are able to participate thanks to access-driven firms like Robinhood, whose fee-less structure revolutionized the brokerage industry. And as a result, low-volume everyday individuals who previously could not justify trade commissions with large lots, can engage in the marketplace and make their money work for them.
But while these revolutionary changes have brought a newfound power to everyday people, they have ultimately been left disenfranchised, lacking the education and tools necessary to navigate a ruthless market. And it all stems from a few disastrous lies purported throughout the internet and implicit in anyone yet to test their validity.
Free money. A fabulous concept, and yet, as if it wasn’t startlingly obvious, nowhere to be found. If money was free, it wouldn’t be worth anything; still, millions go hunting for it in the stock, options, and futures markets. Empowered by a ten-minute YouTube video explaining how to short credit-spreads, so many go pockets-heavy into the markets and return with nothing.
There’s a reason why. In order to sustain the trillions of dollars circulating the world every day, markets have to be incredibly efficient.
In an efficient market, the price displayed of high-volume assets is the fairest value — it is simultaneously the highest price a buyer will pay and the lowest price a seller will accept.
This harmonious binding between buyer and seller is exacerbated across hundreds of assets and markets, thousands of firms, and millions of traders.
If there is ever “free” money to be found — possibly a mispricing arbitrage opportunity across markets, like Bitcoin appearing to be worth less in an Asian market than an American, or an unequivocally true market pattern — the profitable gap would be instantly eaten up by the first algorithm, firm, or trader to lay eyes on it, until the gap becomes so small it is no longer profitable to seek it.
Beating the market requires risk management and an edge. An edge gives a trader a highly particularized vision into the markets, something others don’t have, that allows them to extract a profit where others may not have seen it.
Traders on Wall Street earn fortunes dedicating their lives to finding an edge.
Still, the only thing more important than making profit is keeping profit. The primary reason 90% of futures traders lose 90% of their accounts in 90 days is not that their accounts never saw green — they just couldn’t keep them that way.
While by now it’s blatantly clear that trading is not something one can simply “learn” to do and do successfully, risk management is. The name implies adjusting the risk associated with an account, whereas in reality, it’s more about capital preservation.
Risk management is creating (and sticking to) an order bracket system, daily targets, and other rules of engagement, to protect the capital in your account and allow it to grow steadily.
Some examples of risk management principles are using order brackets with predefined take-profits and stop-losses for each trade type, having a daily net profit target and drawdown limit, making regular withdrawals, and managing lot sizes based on your personal risk tolerance.
Trading with an edge, applying account-specific risk management principles, and strictly abiding by your rules with unwavering discipline are all necessary to beat the market not just once, but consistently.
No longer will an options tutorial or “perfect-stock-trading course” suffice. By managing your psychology, acquiring or developing a functional strategy with a clear edge, and maintaining a rational headspace, you will be well on your way to long-term trading success.
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This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.