Many investors have seen their “stops” — orders to sell securities to protect from losses — triggered only to see the stock market reverse course and post gains.

Other investors have ended up selling securities on technical signals, and then the market does the opposite.

I have received many questions from frustrated investors seeking a solution. I have some tips. But first, let’s explore a real market occurrence.

The annotated chart of S&P 500 ETF SPY, -1.15% shows the market conditions. (Please click here for the chart.)

Professionals recently had a field day eating the lunch of mom-and-pop investors as the Dow Jones Industrial Average DJIA, -0.87% jumped 340 points — from low to high — in a two-day span. These are the individual investors who have learned some technical analysis. In the Morning Capsule that is made available to our subscribers, I wrote: “… [T]he market has the potential to bounce after opening lower.” At the time of that writing, the DJIA was down 180 points. In the middle of the widespread doom and gloom at the time, the rest of the tenor of the Morning Capsule was positive on the stock market, in line with the column published later on MarketWatch titled “Stocks would get support if Trump doesn’t make the same mistake twice.”

Immediately I started receiving messages from investors, who can be divided into two groups.

The first group was the techies, who were sure I had lost my mind because the market had not only broken recent support but also had broken the 50-day moving average shown on the chart. They were aggressively selling. Many investors follow traditional technical analysis. Those two developments shown on the chart are negative according to traditional technical analysis. Don’t worry if you don’t know the terms; I will describe them in plain English later in the column.

Messages from the second group were in agreement with my call. That group consisted of professionals who actually trade securities. They were taking advantage of selling by the mom-and-pop investors, and buying the weakness in the market. By now some of you may have guessed it: The first group comprised the moms and pops.

Ask Arora: Nigam Arora answers your questions about investing in stocks, ETFs, bonds, gold and silver, oil and currencies. Have a question? Send it to Nigam Arora.

How not to have your lunch eaten

Here are a few pointers for mom and pop. Professionals already know these and often take the opposite side.

• In previous times, simple technical indicators worked much better than they do now. These days, following those technical indicators leads to losses over a large number of trades. The reason is that, in the markets, when everybody knows certain indicators, they stop working.

• Simple technical indicators are well-known. How retail investors are taught to use them by those who do not trade with their own money is also well-known. That gives professionals an edge by gaming these indicators and often taking the other side of the trade, especially when there’s no corroboration from more sophisticated indicators, as was the case during the 180-point Dow drop shown on the chart.

• Consider drawing moving averages and support levels on your charts with a crayon, not with a fine-tip pen. The point is to give breathing room around the indicators. I teach investors to use zones instead of single points.

• Do you ever wonder why your stops are hit and then the market reverses itself? It’s common practice to teach retail investors to put stops just below moving averages or support levels. That worked fine in the old days but no more. I wish gurus would stop teaching such techniques.

• Be aware of “hunt-and-destroy” algorithms. Their sole purpose is to profit by taking out stops of naive investors.

Now back to the terms: The commonly used 50-day moving average is simply an average of the closing price of the past 50 days. It is called “moving” because when the data from a new day come in, the data from the farthest day are dropped in calculating the average.

The support level is a level under which the price had difficulty falling below previously. The 50-day moving average breach and support are shown on the annotated chart referenced above.

Gold, silver and ETFs

I find that retail investors most often get burned by professionals in the trading of gold, silver and miners. Especially vulnerable are SPDR Gold Trust GLD, +0.13% , iShares Silver Trust SLV, -1.18% , VanEck Vectors Gold Miners ETF GDX, -1.75% , VanEck Vectors Junior Gold Miners ETF GDXJ, -0.59% , Direxion Daily Gold Miners Index Bull 3x Shares NUGT, -3.54% and Direxion Daily Gold Miners Index Bear 3x Shares DUST, +3.46% .

Please click here to see an example of how professionals beat the average investor.

Other exchange traded funds and exchange traded notes (ETNs) particularly vulnerable to the foregoing issues are iPath S&P 500 VIX ST Futures ETN VXX, -0.08% , Direxion Daily Small Cap Bear 3X ETF TZA, +0.74% , iShares Russell 2000 IWM, -0.26% , SPDR S&P Oil & Gas Exploration & Production ETF XOP, -0.04% , iShares Nasdaq Biotechnology IBB, +0.50% , ProShares UltraShort Bloomberg Crude Oil SCO, +1.19% , and leveraged oil ETNs VelocitySharesTM 3x Inverse Crude Oil ETN US:DWT and VelocitySharesTM 3x Long Crude Oil ETN US:UWT.

Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. All recommended positions are reviewed daily at The Arora Report.

Nigam Arora is an investor, engineer and nuclear physicist by background, has founded two Inc. 500 fastest-growing companies, is the developer of the adaptive ZYX Global Multi Asset Allocation Model and the ZYX Change Method to profit from change in trading and investing. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.

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