Profiting from predictable periodic swings in the stock market: Where does the money come from? [duplicate]

Question

Since Donald Trump has started to impose tariffs and periodically threatening to impose more tariffs, we see that the stock market tends to go up and down. When the stock market goes down by a sufficient amount I put in money in my stock account (which my bank invests this money in index funds). Then I wait until the stock market recovers, I withdraw that extra money I had put in. I then calculate the profit made by this intervention (this takes into account the extra transaction fees). Having done this a few times, my conclusion so far is that doing this seems to be more profitable compared to always leaving that extra money in the stock account.

The question is then where the extra gains I and presumably many other investors are able to make, is coming coming from. Could it be institutional investors like pension funds who have to stick to rigid rules for selling stocks when the price drops?

Answer 1

Since Donald Trump has started to impose tariffs and periodically threatening to impose more tariffs, we see that the stock market tends to go up and down.

The market goes up and down. Sometimes the upswings last longer. Sometimes the downswings last longer. Sometimes the market range trades as it has done for the past 5 months.

Having done this a few times, my conclusion so far is that doing this seems to be more profitable compared to always leaving that extra money in the stock account.

When you time the market right, it's more profitable than being fully invested. When you don't, it's less profitable.

The question is then where the extra gains I and presumably many other investors are able to make, is coming coming from. Could it be institutional investors like pension funds who have to stick to rigid rules for selling stocks when the price drops?

Institutional investors tend to be the smart money and day trading timers tend not to be. While it's anecdotal, web sources indicate that about 90% of day traders lose money. So chances are, your gains are coming from others trying to do the same.

Answer 2

It has been true that "the stock market tends to go up and down" long before Trump. The dubious premise of your question is that the swings are "predictable". You have successfully traded a few swings. This is far too little data to distinguish skill from luck.

If you plot a pure random walk, it closely resembles stock charts, and you can even pick out "patterns" after the fact, but we know mathematically that there is no way to profit by timing a random walk. Now it is true that stocks may differ in subtle ways from a random walk, but this exercise should provide an appropriate humility on prediction.

Simply put, if the market has gone down, in the short term it is about as likely to go down more as it is to go back up.

Even if some investors have to follow rigid rules, there are enough professional traders seeking any way to generate extra gains that, from your perspective as an individual, the "gaming" or "front running" has already occurred and the market price no longer presents any obvious opportunities.

So where does the money you made come from? It comes from other market-timers whose strategies were unlucky in this range-bound period (e.g., trend-following). In a broader sense, it comes from you during some other time when your strategy will be unsuccessful if you keep using it.