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Editor'S Choice - 2020

Is everything all right on the exchange?

“I’ll raise the dough for Forex and go to the fund!”, “Your Forex is a scam, cococo, or civilized markets, there is no risk of fraud!”, “There is no leverage on the exchange, so it’s impossible to lose!”…. etc. screams can be seen periodically in the comments on posts in our VK group.

Only for some reason, the "elite of trading" forget that all the books that say about 90% of losing traders are written ... (drum roll) ... about the stock market. Something doesn’t fit here, don’t you think so?

"How is that, because it’s impossible to lose at the foundation !!! Unicorns are running there and there is a rainbow in the sky !! Everyone paid you the kitchen!" - I already see similar comments on this article))

In today's article you will learn: is it easy to make money on the exchange, what are the risks and disadvantages, are there ways of price manipulation there, and also we will deal with the most popular myths about the stock and derivatives markets.

Where did the stock market myth come from?

As a rule, money is lost for a standard set of reasons arising from a trader’s unwillingness to work in financial and commodity markets. Here, in addition to knowledge, a psychological transformation of personality is required. However, brokers, whose earnings depend on the payment by customers of commissions for each open trading order, begin to convince the client of the wrong choice:

  • Strategies
  • Instrument
  • The market

The last argument is an echo of the struggle between brokers for the client. Each company specializes in one of the markets, for example, stock or derivatives (futures and options) due to separate licensing. The Forex market is separately on this list: firms offering currency speculators trading services in currency pairs and CFDs can open a business according to a simplified scheme, using registration in offshore companies.

Forex is decentralized, unlike stock, commodity and derivatives markets, tied to specific exchanges. These sites have strict state regulation and put forward increased, and therefore costly, requirements for brokers. Most expensive is a license to trade in securities, and by a "strange" coincidence, it is the stock market that is considered "the most profitable for traders where it is impossible to lose money."

Stock Market - Grail or Slavery?

To understand the mechanism of the stock market and brokers, it is enough for a trader to read the book “Memoirs of a stock market speculator. The confession of Jesse Livermore described in it made him famous, and the results of the auction brought the person to an unspoken first place among stock traders.

Despite the recognized value of tactical and psychological advice posted on the pages of this book, one should always remember the tragic fate of the author. On his way there were many cases where Livermore went broke and, ultimately, another loss of funds on stock speculation led him to suicide.

Busting is the traditional end of any stock speculator. The reason is the specifics of sales and trends in the securities market. Shares for sale are held by your broker, for which credit interest is charged to the client, while he is limited in his choice of the list of instruments available for shorts. Will the broker give back papers that will bring him a loss on the sale?

As for the trend, the shares of companies have a greater tendency to grow than fall. See for yourself by opening the index chart. Pay attention to the oldest indicator Dow Jones, which has passed through many crises in 240 years:

Therefore, speculative sales bring loss. Stock brokers usually say that the principle of the grail, which allows you to never lose money, is in the Buy and Hold strategy. A trader must constantly buy securities, increasing the amount of investment in market downturns.

Translating into the language of money management, companies call for averaging positions in stocks and martingale. Forex traders know that both methods are not recommended for use in trading, each trend reversal leads to an increase in losses after a new investment. To persuade the client to this tactic, the broker shows a chart with a clear, growing trend of stock indices reflecting stock growth, and talks about the fabulous wealth of Warren Buffett.

The interest of the company can be understood: shares bring the highest percentage of commissions, in addition to paying margins for the transaction, the client pays monthly for maintaining a loan account and depository services. If you try to withdraw profits from the funds, a "tax deposit" will be withheld, and the amount of the "minimum balance" that the broker will use for free until the end of the tax period will be blocked on the account.

To dispel the myth of the “buying grail”, let’s take a “conditional investor” who invested in stocks 10 years ago in the most highly liquid S&P 500 index, which consists of blue-chip flagships of American business.

The graph shows that the purchase of securities in 2008 turned into a loss. The initial value of the investment returned only after five years of waiting. Throughout this period, the investor would have to live by hopes, but he would have earned if he added funds. In this case, a five-year expectation would turn into a test period at a loss, funds would periodically melt away, and losses would increase.

A ten-year investment period is six years of a flat, when the investor sat and waited for new highs so that the account balance became positive again, that is, for 60% of the long-term period there was no question of taking profits.

It would seem that the expectation is paid off by profit: over 10 years, the total income amounted to 80%. However, 20% of inflation (Fed statistics) and 30% for servicing a loan account and depositary services, as well as taxes (personal income tax 13%), should be deducted from these funds. Net income for such a long period would be 1.7% per year.

In the example, the result of investing in one of the most profitable indices was considered, an attempt to invest in the UK or Japan stock market would result in losses, given the loss on commissions and inflation. The situation on exchanges in developing countries is even more deplorable.

Buffett proof

Each newcomer, coming to the stock market, believes that he can make money on it by gaining the most profitable and fastest growing stocks. Thanks to the media, each of us is aware of the ups and downs of Tesla securities, the very favorable growth of the Facebook rate, the constant trend of Visa or Mastercard and so on.

Warren Buffett dispelled this myth through a public dispute with Protégé Partners, offering them a bet that any professional hedge fund managers chosen by his opponents would not be able to show returns above the S&P 500 in 10 years. In 2017, the debaters gave up lost to the great investor $ 1 million. The “best of the best” five hedge funds chosen by opponents in 10 years were able to earn only 22%, while the S&P 500 showed 80%.

The conclusion is simple - none of the traders makes money in the stock market if we subtract inflation and the costs of paying commissions and taxes from the amount of income. Proved by Warren Buffett, who is ready to argue about this again with anyone.

Why is Warren Buffett confident in his victory? The answer is simple - a great investor was able to earn 99% of his enormous fortune after 50 years, having spent 35 years studying the market, while still leaking 80% of his capital in 2003. He is the only really successful investor on the planet trading stocks, and not a book writer who has shown super results in a short trading period, after which he immediately engaged in training other traders and seminars.

Myths about low leverage on futures and options

On futures, traders also lose money, as well as on Forex currencies. Contracts are traded at the rate of the underlying asset — a stock, an index, a coupon of a bond, a commodity (even a currency pair) with a limited leverage, usually 10, 20, 30 times multiplying gains and losses. On the one hand, this is less than the amount of leverage on Forex, which starts from 50 or 100 and reaches 1000, but this approach is dictated by asset volatility, which is 3-5 times higher than the exchange rate volatility.

Unlike Forex, where currencies rarely exceed a double burst of volatility, on futures and, especially, options, the risks of a sharp change in the fluctuation range are much higher.

If any price panic or euphoria occurs, stop trading will occur, a deposit on futures will be blocked and the trader will only be able to monitor the underlying asset rate. If, after the opening of the site, the gap does not lead to the ruin of the account, the client will still have to urgently seek funds or fix part of the positions due to increased margin requirements, since the exchange will sharply raise its shoulder.

Options can be closed even earlier than futures; the change in leverage in these contracts is non-linear. In order to guarantee safety against risks, brokers set (behind the scenes) the stop-out level at 50%. The options seller must be prepared for unexpected closures of part of the contracts and useless disputes with the company about the legality of such actions.

The myth of futures and options trading transparency

The high percentage of ruin traders on futures forces companies to come up with other ways to attract customers without the promise of a “win-win grail”. Beginners are told about the transparency of the bidding process. Derivatives contracts are traded on the stock exchange, where each participant in the “glass” observes his or her own pending order and sees its execution in the “Tape of all transactions”.

The problem is that bidding transparency is a clear reason for manipulation: the exchange openly merges information on levels of pending orders and order sizes for specially hired companies - market makers. Traders gave them an apt name - puppeteers.

The specifics of their work gives not only an advantage in the information about the "market map", but also access to large financial resources given to the trust management of many large and small clients.

Also, the client is told about state supervision, without devoting to the history of the hundred-year-old unsuccessful struggle of state bodies with cartel conspiracy of brokers, which is difficult to prove and difficult to bring to court. And even when this succeeds, the case still ends with a fine incomparable with the earnings from manipulation.

A newcomer or a professional trading in futures gets on the conveyor of market makers - a large-scale kitchen where brokers organize the following strategies against clients:

  • Ribbon coloring - a lot of transactions in small lots to create the illusion of activity on the instrument, attracting scalpers to create a trend in the instrument. It is used to create high demand for the "distribution" of previously purchased large volumes before a market reversal;
  • Phantoms in a glass or "overflows" - fictitious pending or real "contractual" transactions in order to stop an undesirable trend, "scaring" Sellers or Buyers who believe in the reality of counter-transactions or opposing demand, will take profits and leave the market;
  • Gap - promotion of supply or reduction of demand for the appearance on the chart of a price gap that dramatically changes the cost of a futures per tick;
  • Glass collection - preliminary calculation and a sharp release of transactions at the highest market price, exceeding in volume all the nearest pending orders in the glass. The impulse attracts Buyers or Sellers working according to the “breakdown” strategy, but they become victims of a previously planned “drop of the glass” in the opposite direction;
  • Manipulations with the level of the futures opening price - placing orders on the premarket for inflated volumes in order to fix the price of the first transaction from the opening of the market at the desired level;
  • Corner - an agreement with partners on the transfer of dominant volumes in the underlying asset in order to manipulate the price of futures;
  • Compression - the reverse of the above operation - a set of selling futures positions in the conditions of a shortage of the underlying asset in order to satisfy the client's demand for a short position (to take shares for sale);
  • Controlled flat - trading an asset in a certain price range before the expiration of futures or options in order to maintain the necessary level of contract execution price;
  • Artificial backwardation or contango - market makers prey on arbitrageurs who trade without stops, selling and at the same time buying futures for the same asset with different maturities. The strategy is considered risk-free, since the price difference at the beginning of the contract is equalized at the time of expiration;

Unlike the futures and options market, often gathered at one site, the Forex market is completely decentralized and the exchange rate is formed by recording information on real transactions from many large banks.

The myth of the lack of a "kitchen" on futures and options

Customers are convinced that, unlike the Forex market, there are no so-called “kitchens” among brokers that organize trading within the company, and the exchange protects the asset from any manipulations, because it is accountable to state Regulators. Therefore, trends lend themselves to logical fundamental and technical forecasts, driven by logical supply and demand.

This is really true - a broker cannot organize a “kitchen” on his own, which cannot be said about the exchange itself. National trading floors are trying to offer traders a large list of trading instruments, using for course education data from international trading centers, including the Forex market.

Few people pay attention to the fact that under the Agreement the exchange must, but is not required to, keep these rates consistent. What does this mean in practice? In particular, on the Moscow Exchange, a trader may well, trading in oil, metals or currency futures, receive an unexpected jump in the rate by several percent, different from global values.

In Forex practice, this phenomenon is called a hairpin, and a decent broker in 99% of cases will return funds to an injured client. In the case of the Moscow Exchange - this is called the "market", and no one will return losses from the difference.

A recent illustration of this behavior was Brent crude trading on December 25, 2018. The site, using the fact of closed trading on US exchanges, sharply lowered the oil rate by 11% during a break of 40 minutes of trading. Due to the mechanism of “bars” described in the article above, many positions were closed by margin call or stop out.

This is not the first case of such a price difference. Earlier, in relation to world prices, EURUSD futures, palladium and gold contracts were running away. In all of the above stories, the Central Bank of Russia understood, which did not notice violations or facts of price manipulation.


Leverage-free trading in the stock market does not reduce risks. Any attempt at speculation (buying and selling) will ultimately lead to ruin because of the need to hold a position long enough to earn and justify commissions.

The Buy and Hold strategy, as well as attempts to entrust funds to professionals, will only be profitable for hedge fund managers who immediately charge a fee for financial management. The investor is guaranteed to be left with empty pockets at the time of the next economic crisis, which happens every 5-10 years during the three centuries of the existence of exchanges.

Trading in futures and options on the exchange does not differ from the Forex market, if the broker is chosen correctly, the trader will be protected from chaos of market makers and risks of exchange rate failures due to the illiquidity of exchanges.

Watch the video: Ash-Lee - AllRight prod. by foreign exchange (April 2020).

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