Smoking Out the Truth, Part 1
So often, I speak with market speculators both new and experienced and in conversation, realize that they are talking about something they think they completely understand when in reality, they are 100% wrong. While I certainly don't know it all and very much enjoy learning myself, I thought a short article on "truth" vs. "myth" in markets would hopefully benefit you.
1) "The Forex markets are a trillion dollar market"
While this is true, you and I (retail trader) don't ever trade that market. The market the retail Forex account trades in is tiny. Forex brokers make markets from quotes they get from a bank or two and then typically widen that spread and pass it on to the retail trader. Essentially, a Forex trader at broker "X" is trading the Forex market made by broker "X", that's all. This is why people often ask me the following question: "Why is it that the bids and offers on multiple Forex trading platforms are always a little different, at the same time?" The answer is because they make their own market.
2) "They have good earnings and a broker upgrade so the stock must go up"
As a trader who needs novice money to come into the market each day, I would tell you to please buy every time you hear good news on a stock. As your friend, educator, and proponent for truth, I suggest you look at upgrades, downgrades, and earnings for what they really are, news… While the price of a stock will certainly move on earnings, an upgrade, or downgrade, which direction they will move and where price will move to is 100% a function of the willing supply and demand at each price level for that stock. Quantifying supply and demand can only be achieved by analyzing a price chart. Often, good news will bring price to resistance where the astute market speculator will have a quality shorting opportunity. Just as often, bad news on a stock will quickly bring price down to an objective demand level (support) where the astute trader is offered a low risk buying opportunity.
3) "Futures trading high risk"
Let me start by saying that if you don't use protective stop orders to manage your risk, trading anything becomes high risk. If you do use protective stop orders, futures all of a sudden become lower risk and here are a couple reasons why. First, most of them are 24 hour markets which mean the overnight gap risk goes away. They all close for a few minutes but they open up again and trading resumes. They only close so there can be a settlement. Second, the major futures markets (not all of them) are some of the most liquid markets in the world which means they are as close to a fair trade as there is and you don't have to worry about slippage that much though it can happen. I have been trading over 20 different futures markets for many years and these are some of the most liquid, low risk (when you protect yourself), and diverse markets in the world.
4) "Commission free Forex trading"
This is a play on words designed to get you to open an account. Some brokers offer this and it's fine if that is what you are looking for. Consider however that you will be paying a spread that will likely average 2 or 3 pips which means $20 or $30 dollars in hidden commissions. You can pay that to enter a trade or you can open an account and trade through a broker that charges a commission of perhaps $2 - $5 dollars a trade; it's up to you. The brokers that charge commission typically have the smallest spreads by far (.5 - 1 pip for the Euro/US during heavy trading hours). In short, when someone realizes how much they are paying for commission free trading, they then realize how cheap real commissions really are.
5) "I just learned how to trade so now I need to learn options for leverage"
If you are looking to trade stock options, yes, you will need to learn to trade stock options. If you are going to the option markets purely for leverage, consider that you are about to embark on a very difficult journey as options are not easy to understand for the new option trader. Instead, you may want to consider futures trading as a much more simple way to attain leverage.
The goal of this piece was to open your eyes to certain issues that may impact you. Each issue discussed here has much more information behind it that we typically go over in class. There are also many other important issues that I would discuss but I don't want to ruffle the feathers of the industry too much so I will save that for a much later date. The point is, the more you understand how the markets REALLY work, the more you understand how the industry REALLY works, and the better the odds are that you will succeed. The best advice I can offer to prevent you from falling prey to illusion and misinformation is to use your simple logic filter. If a deal sounds too good to be true, it likely is. If a strategy sounds complicated, it likely does not work. You can also always email me or one of my fine colleagues at Online Trading Academy.
Have a great day.
- Sam Seiden, sseiden@tradingacademy.com
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Sam brings over 15 years experience of equities, forex, options, and futures trading which began when he was on the floor of the Chicago Mercantile Exchange. He has traded equities, futures, interest rate markets, forex, options, and commodities for his personal interests for years and has educated hundreds of traders and investors through seminars and daily advisory services both domestically and internationally. Sam has been involved in the markets since 1991 both on and off the floor of the Chicago Mercantile Exchange. He has served as the Director of Technical Research for two trading firms and regularly contributes articles to industry publications. Sam is known for his trading, technical research, and educational guidance.