I am so grateful that I had the privilege of starting my career in the financial markets on the trading floor of the Chicago Mercantile Exchange. The most important lesson I learned was how money is REALLY transferred from one traders account to another. Every day, through gains and losses, retail trader accounts would be transferred into institutional accounts, market maker accounts, and so on. When markets would decline to price levels where the institutions were buying (real demand, wholesale price), retail traders and investors would sell because of the decline in price and the bad news that typically accompanies price declines. Institutions would buy at demand, retail would sell, price would then rally and the account transfer was underway. As price rallied, green candles would fill trading screens around the world, good news would start to creep in, causing more and more buying which led to more and more of a rally in price until, price reached a level where the institutions were sellers, (real supply/retail price). At this point, the buying bandwagon was in full force sucking in most retail traders on the buy side, right into institutional supply. As soon as the last novice buyer bought from an institution or market maker at the supply level, price would decline and the account transfer was complete. This was my experience for a long time. I often thought a simple wire transfer would be quicker and less painful for the novice retail trader or investor but I guess we wouldn’t need markets then and that would not be good.
As the trading floors slowly fade away into the non-tech black hole that sucks up anything non-electronic, you might think that astute traders are losing the very profitable link to retail traders and that herd mentality. Think again… The supply of novice retail traders and investors who have no idea how to quantify supply and demand (retail and wholesale price) has been exponentially increased thanks to a new market place much larger than the exchange ever was, “The Social Media Revolution.”
Let it be known that I am the biggest fan of social media. This is the greatest gift to the financial world since Level II data became available. Level II is another trap for retail traders that very easily has retail traders buying at retail and selling at wholesale, brilliant and easy for financial institutions. Let’s take Twitter as our first example. I was asked to speak on a Social Media panel in Toronto a while back. As I did my research and got more and more involved in Twitter, Face Book, and various chat services, I was shocked. On Twitter for example, someone people follow said they had just bought a stock. This message went out to the initial group, then that groups group, then that groups group, and so on… As I watched the stock rise, I thought of Bernie Madoff, only the legal version. The guy who was the first buyer was a genius. Each buyer after him on this enormous chain of “followers” was simply paying those in the chain that bought before him. If you don’t have a Twitter account, this is kind of how it works. People find you and start following you. You get an email that actually uses the word “follow.” For those who know how to buy low and sell high in a market, we LOVE followers.
Someone would use social media such as Twitter, Google chat, and many others because they are either looking for trading and investing advice and information. OR, they may be in search of education. Those who simply want advice and information want it fast… Social Media financial information leads to herd mentality trading and investing like I described above. Those seeking education don’t know the difference between real/quality education and useless or misguided education. How could they know the difference? They are looking for it because they are new and don’t know. Whether someone is going to Social Media for trading advice or education, going to Social Media is most often a path filled with traps that really speed up the account transfer from those who don’t know what they are doing, into the accounts of those who do.
What determines whether you achieve financial success from trading and investing is not faster information and more education, its proper information and education that separates the haves from the have nots. Social Media is great for personal interaction, relationships, and so on. When it comes to anything having to do with true competition, the Social Media participant who is competing is typically in big trouble.
Why do you think big trading firms PAY retail brokers for retail order flow (payment for order flow)? They want access to the orders from retail, novice traders. Yes, I said they “pay” for retail order flow; there is a reason. More information on “payment for order flow” can be found on the SEC website.
Instead of reading all the trading books and learning to buy and sell in markets when everyone else buys and sells which offers no edge…
Instead of acting on the advice of others who likely get paid from that advice, not the advice itself or from trading…
Pay attention to what is happening in front of your eyes on your trading screens and charts every day, week, month, year… Pay attention to what is happening around you. Pay attention to the simple reality of how you make money buying and selling anything. This is exactly how the astute market player thinks and acts. You likely are already an astute buyer and seller at the grocery store, when you buy a car, and so on. Simply apply that same logic in the trading and investing markets and you will quickly own an edge that most people never come close to. If you feel like your account or savings is slowly being transferred into someone else’s account, stop thinking and acting like others do and focus on how things really work.
Hope this was helpful, have a great day.
Sam Seiden – firstname.lastname@example.org