a very interesting answer at QUORA (in german; translated via google) -> dumb vs smart money
How is it that small investors constantly lose money while trading?
This is simply because the retail investor or retailer does not realize that the financial market is a zero-sum game and he therefore does everything wrong, which can only be done wrong. Not without reason they are referred to in the industry as "dumb money". The retail investor must be deliberately misled and inevitably lose money because they are the profit of big fish (I hate this denomination, smart money sounds better).
Smart money recognizes the signs in the markets, but that's a problem because they all go in the same direction. So, if smart money buys then there has to be someone selling to them. This is where dumb money comes into play. They are the liquidity we need. You have to do the opposite of what we do. If we go long, we have to make sure that they shorten. If we shorten, we have to make sure they go long.
So we have to create illusions:
1. The illusion of market sentiment, or how to manipulate the order books of brokers, investment banks, and clearing houses
Felt 99% of all retail investors always consider the so-called market sentiment in their trading decisions. This is the sum of both open and pending buy-sell positions, displayed as a percentage. So when the chart says "75% sell," retailers tend to sell (human herding).
But that's a problem, because in the end we're the ones who are moving the huge sums of money. At 500,000 Max Mustermanns (dumb money), the average per capita with 3000 euros to trade, comes a hedge fund (smart money) with an average of 25 million euros. So a few hedge funds can greatly influence the gap between buy-sell and thus change the market sentiment. Once the retail investor gets wind of it, as suddenly "12% buy" to "80% buy", then he wants to go long and that drives up the price, because the demand has increased enormously, but the supply has not risen. As a result, smart money loses money.
So we ensure that by so-called zombie orders, the perception is deliberately distorted. A zombie order is a buy-sell position placed in various places, in bulk, above or below the current market price, but never triggered as opposite positions are opened just before the corresponding price is reached. Before that, the zombie orders are changed algorithmically at irregular intervals and placed elsewhere, to give the impression that the market's expectations have changed.
So if a negative market position is suggested, then "dumb money" panic and thus increases the supply and the price drops. Meanwhile, smart money buys these shabby financial products, and if there are no retailers left to sell, then the markets become aware of the shortage of supply and prices go up. Therefore, the market sentiment that the small investors like to orient, completely useless and only serves to lure retail investors into a trap.
2. The illusion of volume, or how to become invisible to the stock market via dark pools
When it comes to financial products that are traded on the secondary market (stocks, bonds, commodity contracts, etc.), there is an exchange supervision. One of the tasks of this supervision is, among other things, to measure the trading volume in real time, whereupon all market subjects have an insight. But this is problematic if we want to buy a commodity contract on sugar, amounting to $ 30 million. If we were to wield the $ 30 million on the secondary market, market makers would see that because of the increased trading volume, someone is in the process of making a big deal and they will increase the spread, which in turn (depending on whether long or short) influences the price. This is also noticeable to the other market subjects, who keep an eye on the trading volume. The market reacts here even before we own our stocks, bonds, futures, options, etc. This reaction is unprofitable and, in the worst case, can cause panic.
Such price shocks are bypassed by a so-called dark pool. This is the deep web of the financial market. There anonymously change share packages, bonds, options and all sorts of financial products that are listed, in a matter of seconds the owner, without the police (stock exchange supervision) will notice something. Since the volume is unknown due to decentralized transactions, millions to billions of dollars can easily be moved with a click of the mouse without anyone getting wind of it. However, one must after the transaction, the respective financial regulatory authority (in the US, this is the SEC) tell in what amount you have, for example, acquired shares of XY.
However, this makes use of the large speculator and asset manager, from hedge funds to ordinary investment funds. Because this information is made public by the authority, picked up by the media and spread everywhere like a bang. So when headlines from Wall Street Journal, Handelsblatt, CNN, CNBC, etc. say, "XY becomes majority shareholder of ABC with 17.2%," the mass of retail investors is hysterical and also increases. This pushes up the price and that is the moment when smart money is sold to the retail investors who, thanks to the so-called experts in "Börse vor acht" and their consorts, think that they have got the next big thing. In this method, only by the herd instinct and the blind authority faith of the mass is made profitable.
3. The illusion of indicators, or how retail investors are kidding themselves
When I was working at Blackrock, there was a cynical slogan that the guys from the trading department told me during their lunch break: "Indicators are the suicide weapons you give to retail investors . "
No matter where you look, every broker, every bank and every seminar propagates the same indicators and strategies for their clients: MACD, Stochastic Oscillator, Bollinger Bands, Accumulation / Distribution, etc.
They serve only one purpose: to make Max Mustermann believe that the market has a system and that he can control this system. To make him believe that there is something like a trend in the price. If the retail investor does not get a sense of control, then he feels like being in the casino and helpless. What do people do when they feel helpless? They despair and flee and now dumb money is missing. The brokers can no longer collect commissions from Max and suddenly smart money no longer has a golden cow to milk. The party is over.
That's why you make sure that the retailer is constantly fooling himself. But you can not let him lose all the time, otherwise he would resign himself and think "I can throw money out of the window right away". So the markets are influenced in such a way that these indicators occasionally apply, Max wins a little, and his prefrontal cortex gives him euphoria, so he persuades himself he can actually "beat" the market. Euphoria and anxiety are two extreme feelings that can lead to loss of control.
Indicators may be interesting from a mathematical point of view, but they are useless in practice because they only reflect what has already happened in the markets, but can not predict the future development. Nevertheless, the retail traders like crazy on it and always looking for the system par excellence. The only problem is that the financial markets are not systemic, but the market conditions, and thus the price, by the psychology of the mass, is subject to constant change. You can not expect in a dog-eat-dog industry, where everyone is against everyone, in the long term to win if you do what everyone else is doing. Indicators are a sleight-of-hand trick.
Three times you can guess who is "dumb money";)
The reason why 99% of all market subjects lose is simply because they are kept from understanding that markets are psychologically motivated and have virtually nothing to do with finance. It is always said these days "the financial markets are now decoupled from the real economy". They have always been, that is not a modern phenomenon! The tulip crash in the 17th century proves it. It is a constant game between fear and greed, pessimism and optimism. Money leverages all reason-oriented, rational ways of thinking and lets people act on impulsive, primitive, instinctual emotions. If you do not let yourself go, you will go home as the winner.
A striking example that I just remembered was the crash of the EUR / CHF in 2013. It became clear how much the herd instinct can get out of control. The Swiss National Bank has said that it will fix its currency to the euro (pegged currency rate) at an exchange rate of 1,204
That means from the perspective of the financial markets that the price can not fall below 1.204. I and my team then speculated that this circumstance would make the marketplace bullish and that all of them, because of this deceptive certainty, would order a buy order at 1,204 because they believe there is no downside risk below that exchange rate. We therefore sensed a huge potential that we could exploit, so I told the head of the trading office to instruct the boys to buy the Swiss franc and at the same time to short the euro, that is to sell because we expected that the euro would depreciate in relation to the franc, provided that the swiss national bank repeals the fixation.
In January 2015, it happened: they announced that they had lifted the fixation. Within one day, the EUR / CHF crashed down, triggering all buy trades placed at 1,204. Both retail investors and their brokers have been trying to close positions that are continuing to slide lower, but since no one expected the 1,204 mark to be lifted, there were no buy orders down there. Nobody wanted to buy the Euro, they fled en masse into the Swiss franc. Many brokers went bankrupt and many retail traders had a negative balance after waking up in the morning. The original, exuberant optimism has turned into a mass panic within a few hours.
These are all the nuances that retail investors do not see. But when they realize it, they change from "dumb money" to "smart money" ... so they play in the 1% league. Please do yourself a favor and forget all the pseudo-experts in stock market before eight, or recommend any banks, brokers, seminars, financial newspapers or Youtuber ... they are all there just to mislead you.