Fourteen Popular Fallacies, or What Not to Do Wrong

The fault, dear trader, is not in the fundamentals, but in ourselves.

(With apologies to Shakespeare)

Five Short Scenes

Scene 1

The U.S. Treasury announces a new plan to sell stockpiled gold. Not surprisingly, the market opens with near-limit losses the following day. You reason that the new gold sales will sharply increase supply and that, therefore, the market still offers a good selling opportunity, even given the decline. You are somewhat concerned about expectations for continued increasing inflation and dollar weakness but decide the gold sale will dominate market action over the near term.

After going short, the market hovers for two days and then, as you expected, breaks sharply. One week later, your trade is substantially in the plus column and convinced that you have caught a new bear market in its infancy, you resolve to hold the position as a long-term trade. The next week, however, the market begins to rally inexplicably, and your profits evaporate. Paradoxically, despite an absence of any meaningful bullish news, the rally continues and prices even surpass the levels they were at before the U.S. Treasury announcement. Your losses continue to grow, and finally you bail out, promising yourself, “That’s the last time I trade on fundamentals.”

Scene 2

You’ve done your homework and feel confident the U.S. Department of Agriculture’s 50-state Hogs and Pigs report, which will be released in the afternoon, ...

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