The Difference Between the “Retail Investor” and the Educated Trader

By   |  February 27, 2013

“The most money in nine years went into stock market mutual funds last month, with the Investment Company Institute reporting that U.S. equity mutual funds brought in a net $19.6 billion in the four weeks ended Jan. 30. Since retail investors have a reputation for plowing into stocks at just the wrong time, that’s got some market-watchers anxious.”

—Wall Street Journal, 2/20/13

“Markets have been rising and investors returning to stocks, thanks to cheap money from central banks, a rash of takeover deals, the glimmers of economic recovery—and an epidemic of amnesia.

“Many investors have been behaving as if the bloodbath between October 2007 and March 2009, when the U.S. and global stock markets lost at least 50%, had never happened. More worrisome, investors are forgetting the agonizingly real fear they felt during the financial crisis.”

—Wall Street Journal, 2/22/13

The past few days must have been tough for those retail investors who are just getting back in the market. On Wednesday February 20th, the S&P dropped 1.2% the day after its highest close since before the 2008 crash. It looked like it might come back the next morning, but then dropped again. On Friday, when many of the faint of heart may have bailed out, it shot up nearly 9 points. But then on Monday 2/25 it dropped almost 28 points and 1.83%, in the worst day for the market since last November.

For the students and graduates of Online Trading Academy, it was business as usual. During the week of February 18th, we set up 11 trades in Pro Picks, took 6 of them, made profits on 5, for a net of $1076 on the week. We didn’t hit any out of the park, but didn’t take on much risk either.  We simply followed our rules-based strategy in which we identified supply and demand zones in advance and set up potential trades if price entered those zones. Then, on Monday as the financials were crashing we took a short on JPM (J.P. Morgan) and pocketed over $4,000 on the day with a single low-risk, high-potential trade.

The retail investor (also known as the novice or uneducated trader) makes the same mistakes over and over again—buying after a run-up in price, as the market is approaching a supply zone and price is about to turn in the opposite direction. We saw some good examples last week and probably will again this week, as March 1st approaches and nervousness about the “sequester” rattles the markets.

Meanwhile, we’ll keep following our supply and demand trading strategy that allows us to plan trades that can generate income in good markets, bad markets, or sideways markets.