What makes me really angry?

 

But one of my big bug bears in trading is when so-called ‘trading gurus’ try to blame anything and anyone but themselves for failed trades. At best, it shows a lack of understanding of how markets work; at worst, it shows dishonesty.

So, for the sake of my sanity, and (I hope) to alert you to these dirty tricks, I’m going to offload a little …

What’s the problem?

I expect if you’ve traded even a little bit, you’ll be familiar with the experience of the price moving down and just touching out your stop, before reversing into positive territory.

You’ll probably have also seen prices shooting up to a level just short of your target, before turning tail and stopping you out.

It can be uncanny how often this happens.

And it can feel like someone’s got it in for you.

Almost like someone has seen where your stop level or profit target is, and they are manipulating prices to get their hands on your money.

Who are the bad guys?

I often hear ‘words of wisdom’ being shared on internet forums and the like, that ‘market makers’ are the villains who’re out to sabotage your trading.

And if you’re not party to this knowledge, the suggestion is that you’re somehow naïve and being taken advantage of. It’s the classic defense of the conspiracy theorist: ‘Ah, but that’s what they WANT you to think!’

As the line goes, ‘A lie can travel halfway around the world while the truth is still putting on its shoes.’

And a conspiracy theory can certainly travel faster than a global pandemic. Last week, my mother-in-law’s carer gave me a detailed analysis of how the coronavirus was leaked from a high security lab in Wuhan. She seemed to know a lot about it!

So, are there really bad guys who are manipulating the markets? Or is this a conspiracy theory?

Let’s look at the suspects …

One of the suspects is your broker

While we ‘little guys’ sit in our homes, on our laptops, determinedly battling the markets for a profit … our brokers are the guys in sharp suits who get rich.

That definitely makes them sound like villains.

So how do they get so rich?

Spread-bet firms (as their names suggest) make money on the ‘spread’ – the difference between the buy and sell prices on your trades. This gives them a cut, every time you place a trade, whether it wins or loses.

While I don’t enjoy paying a spread – it’s a transparent cost that’s agreed up-front on the trade.

To a large degree, your broker’s book will be naturally balanced, with one client selling GBPUSD, and another buying GBPUSD. As one side wins, the other loses, and the broker is taking no risk in the market, instead just earning money from the spread and daily rolling charges their clients pay.

For the proportion of their book that isn’t balanced, a broker will have risk limits they must work within, and will look to lay some of that excess risk off in the real market – going out and buying GBP (or whatever) to balance their book.

So, for the most part, your broker is just a middleman, remaining market neutral and taking his cut. But with any unhedged positions on their books, they will be taking a risk, and are essentially betting against you.

Does this mean they’ll hunt your stops?

The prices offered by your broker are not necessarily the true market price, but can vary by a few points. This does give them the opportunity to manipulate the prices you see on their platform, and leads people to believe their stops are being hunted.

But if you’re using an FCA regulated broker in the UK, they’d be breaking the law doing this. Also (unless they were manipulating prices to an individual client level) they’d be leaving themselves exposed to others getting into a market at a false and advantageous price – so it’s a very dangerous game for them to play.

I’d be lying if I told you that I’d never had suspicions about any brokers manipulating prices … but, it’s easy to get cross with our brokers, who are really just the messengers of what’s going on in the market.

What’s really going on when markets just nudge out our stop levels?

The truth is that there’s no great conspiracy out there. It’s much simpler than that.

Buyers need sellers, and sellers need buyers.

Big market investors who want to buy into a market need to find sellers. This isn’t the kind of liquidity that you or I need – in major markets, there’s almost always enough liquidity for our little plays. But if you’ve millions to invest, you need to find a lot of sellers.

Where can you find a lot of sellers?

Ah, they’ll be in those big pools of liquidity offered by the thousands of stop levels bunched up just beyond support levels and round numbers. These stop orders mean that buyers can get their orders filled, and then the price rebounds.

It’s simple market forces.

Why it’s dangerous to be dishonest about this

Of course, it’s useful to have someone to blame when things don’t work out for us.

My broker … market makers … central bankers … they’re all hunting down my stops.

But the reality is that I’ve just put my stop in a too-obvious place. By accepting this, I can learn to be position my stops (and targets) in a smarter way.

Getting smart is much more useful than getting angry (note to self!)

It all comes down to wriggle room. Orders will cluster around round numbers and support/resistance levels, so if we can add a few points of extra buffer around these levels, everyone else’s stops will be hit before ours (and will hopefully give the hungry market makers all the liquidity they need before they reach our order).

However, every point of extra ‘padding’ we add to our stops, is an extra point we’ll lose. So it has to be a balance, and sometimes we’ll get caught.

If sometimes our stops are just touched out, it probably means that we’ve got the balance about right – we’ve enough wriggle room for it not to happen too often, but not so much that we’re upping our risk levels too high.

So, next time your trade gets just touched out by a fraction of a point … pat yourself on the back, because your stop placement is probably just about perfect.

And the next time someone tells you their stops are being hunted by the bogey man, you can tell them that they just don’t understand how the market works.

And thank you for letting me have my rant!

 

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