[filoleg]

> Could you talk more about correct hypotheses resulting in loss in trading?

Not the person you are asking, but I can answer this.

You can have a correct hypothesis, but still fail if enough market participants had the exact same hypothesis that they acted on. Because it would lead to the effects of that hypothesis being priced-in.

Made up example: you have a hypothesis that a seemingly unrelated event A will lead to a price increase in sesame seed futures, so you decided to purchase them (expecting them to go in price due to event A, so that you can sell it later at a profit).

The issue you might encounter is that many other market participants recognized the potential effects of event A, so when you buy those sesame seed futures, that potential profit from event A is already priced-in (due to others recognizing it and trading accordingly, thus increasing the price of the futures by the time you buy it, which means that the future gain you expect on those futures has already happened), so you won’t make any gains from that.

As a bonus, if that event A doesn’t manage to factually affect sesame futures once it happens, or it won’t happen at all, you can expect the priced-in portion of the futures’ value pretty much vaporize. Which makes it really lucrative to trade against priced-in events, but it is also risky.

You might ask “but wouldn’t that mean that almost everything is priced-in”, and the answer is “kinda yes”, which is where the origin of the “everything is priced-in” meme comes from (note: it isn’t really true, but it is also really kinda is true).

[em-bee]

so you when many people have the same idea you only win if you are the first. couldn't you check that by looking at the price development up to now?

[filoleg]

> so you when many people have the same idea you only win if you are the first

Not necessarily. Being “priced-in” is not a binary event, it can be more or less priced-in. You can still make good profit even if you weren’t one of the first people, you will just make less than the first people, and that’s ok.

> couldn't you check that by looking at the price development up to now?

This ties into my statement above. You can look at the price development, but it won’t tell you “how much it is priced-in” at the moment. It could be fully priced-in with no more left to go. It could also become less priced in (aka more room for you to make profits), as new developments outside of the market occur (e.g., the certainty around event A occurring and affecting sesame seed futures gets increased due to some recently published study).

Price developments also don’t tell you much, as it is a blackbox. Movements could be occurring due to it being relevant to your hypothesis, they could be occurring due to some meta moves (e.g., fed interest rates changing or fed unemployment rates being published), or due to something entirely unrelated whatsoever. It could be just some noise, or it could be something relevant to your hypothesis. In case it is relevant to your hypothesis, it could be that the market reacts fine, but it could also be the case that the market ignores it for a while or overreacts to it.

Markets aren’t a solved problem, and there are no hard and fast rulesets on how to trade successfully. Just make sure you are constantly reassessing your risk profile while utilizing as many relevant variables (which could affect it), and you will be less likely to make terribly naive trades.

That also means, sometimes, not listening to what the prevailing majority (or vocal minority, depends on how you look at it) says. A lot of mainstream reporting on finance these days is not much better than mainstream reporting/“journalism” in general, with the stories based off a few cherry-picked numbers or a couple of tweets. That isn’t to say there is some conspiracy or intentional malicious play happening, there isn’t (on any meaningful scale that would actually matter). It’s just the usual quick-and-fast profit-chasing reporting with the lowest common denominator writing quality. Luckily, when it comes to finance, all the factual happenings have to be disclosed in quarterly earnings reports, so following the source material is very easily doable and helpful (which isn’t the case for a lot of contexts outside of finance, sadly).

Case in point: when Meta stock died heavily a couple of years ago during the whole metaverse hype, I remember thinking that the metaverse bet by Zuck was a bit too optimistic and forward-thinking (i legitimately think it was just too early for its time, given the current state of tech and internet coupled with Zuck’s optimism). I was certain that the market overreacted massively, and I also remembered that every time Zuck was clowned for his controversial strategic decisions before, he would always have the last laugh (just check all the news articles related to Instagram and WhatsApp acquisitions, or articles about IG copying Snap Stories feature). Coupled with strong earnings reports and forward-looking guidance presented during those, I was certain that betting on Meta would be a big payoff. The market had priced-in failure for Meta already, and the possibility of the Meta doomer hypothesis being wrong seemed very likely to me. So I bet big on Meta around that time.

Sure, for the first year of that, I was losing money (I bought-in after Meta went down to slightly below $200/share) as the meta tanked down to $100. But I held, as I was certain of this just being an overreaction, and it paid off. Would it have been much better if I waited until Meta went down to $100/share before I bought in? Sure, but I can’t time the markets perfectly, and I am more than ok with the outcomes I got. Remember that perfect is the enemy of good.