To The Moon

Trading U.S. stocks is a psychological battlefield where even seasoned investors fall prey to market illusions. These cognitive biases lead to costly mistakes, from chasing euphoric highs to panicking at sudden lows. As of June 23, 2025, the S&P 500 has gained 1.47% year-to-date (YTD), but volatility from geopolitical tensions and Federal Reserve policy shifts highlights the need to recognize these traps. Let’s explores five common market illusions, their impact on trading decisions, and strategies to stay disciplined.

Common Market Illusions

1. The Confirmation Bias Trap

Investors often seek data that supports their beliefs, ignoring warning signs. In early 2025, many held Advanced Micro Devices (AMD) expecting an AI-driven rally, despite U.S. export curbs to China. AMD’s stock rose 6.17% YTD to $128.24, but earlier optimism on platforms like X ignored risks, leading to missed opportunities for rebalancing.

2. The Recency Bias Mirage

Recency bias overweighs recent trends. After the S&P 500’s 23% surge in 2024, traders assumed 2025 would follow, buying NVIDIA (NVDA) at peak valuations. A correction in March 2025 caught many unprepared, as they overlooked historical mean reversion cycles.

3. The “I Saw It Coming” Delusion

Hindsight bias convinces traders they predicted outcomes after the fact. After the Dow’s nine-day losing streak in December 2024, many claimed they foresaw tariff-driven volatility, yet few acted. This fosters overconfidence, leading to riskier bets.

4. The Waiting Game Fallacy

Loss aversion drives traders to hold losing positions, hoping for recovery. Marvell Technology (MRVL) investors clung to shares after a 33% YTD drop, expecting a rebound post-merger news. Losses deepened with Amazon’s Trainium3 socket loss, showing the cost of delay.

5. The FOMO Frenzy

Fear of missing out (FOMO) sparks impulsive buying during rallies. Micron Technology’s (MU) 31% monthly surge to $123.60 MTD June 20, 2025 triggered FOMO, with retail traders jumping in.

Impact and Real-World Examples

Market illusions amplify errors. A 2023 Charles Schwab study found retail traders swayed by FOMO or confirmation bias underperformed the S&P 500 by 5.2% annually. In 2025, U.S. strikes on Iranian nuclear facilities spiked oil prices to above $80 per barrel, fuelling panic buying in the United States Oil Fund (USO).

Strategies to Break Free

1. Journal Trades: Document entry/exit rationale to counter hindsight bias. A 2024 Behavioural Finance Institute study showed journaling boosted returns by 3.8%.

2. Set Rules: Use stop-loss orders (e.g., 10% below entry) and profit targets to avoid loss aversion and FOMO.

3. Diversify Sources: Balance X’s bullish posts with bearish analyses from Morningstar to combat confirmation bias.

4. Pause During Volatility: Wait 48 hours after events like Iran strikes to avoid recency bias-driven trades.

5. Backtest Strategies: Test plans against historical data to reduce emotional swings.

Trading Idea: Disciplined ETF Approach

To sidestep illusions, try a low-risk ETF strategy:

Long $SPDR S&P 500 ETF Trust(SPY)$ (Entry: $590-$600, Target: $650, Stop-Loss: $575)

• Rationale: SPY’s broad exposure minimizes stock-specific bias. With two Fed rate cuts expected in 2025, SPY could gain by year-end, per historical rate-cut rallies.

• Probability: High, supported by SPY’s YTD gain.

• Risk: Tariff-driven inflation could delay cuts, pressuring equities.

Conclusion

Market illusions like confirmation bias, FOMO, and hindsight bias trap traders in costly cycles. In 2025, with volatility from Fed policies and geopolitical risks, discipline is key. Journaling, setting rules, and diversifying inputs can break these traps. Trading SPY with clear targets offers a structured path forward.

As always, Do Your Own Due Diligence and ensure risk management > prediction. Trade smart, stay adaptable, and don’t let emotions chase candles.