It’s a Trader’s Market

Should mom and pop investors venture into this highly volatile market?
By James Gorrie
James Gorrie
James Gorrie
James R. Gorrie is the author of “The China Crisis” (Wiley, 2013) and writes on his blog, He is based in Southern California.
April 10, 2020Updated: April 14, 2020


As the world seems to be spinning off its axis into some inverted parallel universe, why on earth is the stock market having so many up days, let alone several?

On the one hand, the desire for good news—any good news—is exciting, especially since the world we used to know just a few weeks ago now seems like a galaxy far, far away. So yes, bring on the good news.

We can certainly use it.

But on the other hand, to see the Dow up 285 points the same day that reports come out about another 6.6 million Americans filing for unemployment is a bit curious. Nearly 17 million Americans have now lost their jobs and the market rises. Is that, too, part of the new normal?

Perhaps so. But just who is buying the market these days?

Not Your Average Market

It certainly isn’t Jack and Jill U.S. citizen right now, is it? At least, not so many of them. Having recently lost their jobs, millions of Americans with 401(k)s and IRAs are living off those savings.

Now, don’t get me wrong; obviously, there are people in the market these days. But it’s a pretty sure bet that many of them are traders, who are busy taking the money from less-savvy investors. In times like these, the market favors traders more than it does investors.

That’s because there’s a big difference between investors and traders. Investors, that is, people putting money into their retirement accounts, which amounts to hundreds of billions of dollars per year, aren’t usually market-savvy investors, but rather, long-term investors.

These investors, who make up working America, understand and prefer stability in the market that leads to steady and at least somewhat predictable gains. They look at the long-term charts of the market and see predictability and growth, and are comfortable with that.

Volatility Scares Investors

Market disruptions, that is, times when there is a high level of volatility, scare investors. And rightly so. The perceived security of predictable growth is replaced by what appears to them to be unpredictable swings in the market. And, because most investors remember the crash of 2008 and the massive losses they incurred in plunging stock, bond, and real estate values, many will be on the sidelines, just as they were for years after the last crash.

That’s because investors typically look at the market in terms of relative price and the fundamentals of the company itself, not the stock. Those are two very different things. Investors may venture into a volatile period like the one we’re in now, but will usually lose money.

A typical scenario is that an investor will see a depressed price for a stock that used to be $60 trading for $25. It looks like a deal. So, thinking that the company is a solid one, and that the price should bounce back up soon, the investor buys the stock.

And the stock might well return to its pre-pandemic price or even a few dollars higher than where the investor bought it. Great. But who knows when that will be? And what’s to stop the price of the stock falling further? It may well drop even more in price before it hits the bottom and starts to go up again.

That’s what often happens to so many investors’ portfolios in times of high volatility. Their losses begin to add up as the stock that looked like a deal at $25 falls to $15. They start to think that the stock may never recover, and fear losing all of their investment. That’s when investors often sell their losing investment, taking a big hit in the process. They sit on the sidelines until things get back to normal.

Traders Love Volatility

Traders, on the other hand, see that same stock and don’t care about where it was before the bear market, because that was before the bear market. In fact, traders love volatility. Volatility means action and opportunity. As any trader worth his or her salt will tell you, a bear market—which we’re certainly in now—is where the biggest trading profits are made the fastest.

That’s simply because when a market turns, or in this case, comes crashing down, stock prices tend to fall much further and faster than when they rose. In other words, the drop is much steeper than the rise. Traders live for this kind of market.

Smart traders see the market not for where it was, or even for what it might be in the long term. Rather, they tend to focus on the technical aspects of an equity’s price, relative to buying and selling action alone, in the near future.

In other words, traders often look at price trends on a particular stock, ETF, or index, and assess the likely direction its price will go based upon a variety of analytical tools, techniques, and institutional trading patterns. These technical analytics tend to give traders a much clearer—or at least statistically more likely—understanding of where the price of the equity will go in the near future. They’re not relying on the health or reputation of the company itself.

Following the Big Banks

A big part of that analysis is often determining how the large Wall Street banks and other financial institutions are positioning themselves relative to the market and a specific equity. These financial institutions are key factors in the market. There is, after all, significant levels of coordination between the Federal Reserve and Wall Street. (Recall how the Fed called in all the big Wall Street bankers for a coordinated response during the last crisis in 2008.)

Thus, identifying how and when institutional positioning will be arranged and liquidity support is coming from the Federal Reserve is another key factor in making money, not losing it, in times of crisis such as the one we’re up to our necks in right now.

Can investors make money in this market? Of course, they can. All it takes is being on the right side of a trend, and taking your gains before the price falls. For most people, however, that isn’t nearly as easy as it was two months ago.

James Gorrie is a writer and speaker based in Southern California. He is the author of “The China Crisis.”

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.