Is the Stock Market Rigged against the Little Guy…?

...and what you can do to fight back against the system.

6 minute read

The stock market is a rigged game, financial institutions (banks), hedge funds and other conglomerates all use high frequency trading algorithms to front-run the market and make profits at light-speed (it’s technically not illegal, but there should really be some kind of warning on your trading platform to tell you this, right?!). In today’s trading arena execution speed is king, and these organizations will stop at nothing to shave an extra 3 milliseconds off the speed at which they can execute a trade, which includes spending hundreds of millions of dollars to lay the latest high-speed fiber optic networks in order to do just that.

Is the Stock Market Rigged
Large financial institutions are at the forefront of the high frequency, algorithmic trading which dominates today’s markets. They are cold, calculated and absolutely ruthless when it comes to taking every last cent from retail traders (new and experienced alike).

In addition to this super-fast order routing, these organizations have the smartest quantitative analysts on the planet (the types of guys who can calculate the mathematics to teleport into another dimension, but have never slept with a woman) developing trading models and algorithms which can weave their way through the market in such a sequence that they will extract money from novice retail traders regardless if they are buying or selling a stock. The computer programs themselves are self learning and are continuously performing hundreds of thousands of calculations based on order flow, and then making calculated assumptions with regard to stop loss locations.

 

It’s easy to be naive and dismiss the fact that this is going on inside of the markets; put bluntly, it’s a total head-funk to accept because you logically know that you don’t have the mathematical resources, or the millions of dollars to compete with these large scale financial institutions. If you are going to become a profitable trader, you must accept this market landscape in its entirety, and then use your own smarts to profit from what appears, on paper, to be a no-win battle.

 

You can look back through stock charts and see various patterns repeating themselves, patterns which you have likely been told can form part of a successful trading system. To use a crude example, if you carry out back-testing and discover that when a head and shoulders formation appears, it is successful 70% of the time, then this finding would serve as a sensible basis for a trading strategy. But would it really?

 

It is taken for gospel that patterns in the charts repeat themselves over time because no matter which time period you are in, the emotions of the market participants (sheeple) remain a constant. The problem arises when you realize that this idea is based on historic charts, when there was no such thing as computer algorithms trading in the markets. The fact that there is now a completely different market landscape, one where over 50% of the market is now trading without emotion (algorithms), then it is safe to assume that the historic chart patterns of old will quickly be replaced by new, and potentially a lot more more complex patterns.

 

The only way in which you stand a chance to profit at the expense of the bent banks, shady hedge funds, and large crook conglomerate trading firms is to use pure logic and pragmatism in your approach to trading the markets. You need to accept that the things you may have read up on, in terms of chart patterns and formations might not actually be relevant in today’s market environment. You are trading against god damn robots, so you will need to Schwarzenegger-Up and adapt to this!

"Identifying the moves that computer algorithms are making is not a simple challenge, they move so quickly that they often do not leave an obvious impression in the charts; they have been designed this way (like money-swindling poltergeists)."

The robots you are trading against rely on speed (execution speed, not uncut amphetamine drugs), and if you had the mathematical know-how, you could no doubt reverse engineer their formulas and make counter-trades against them. One way in which you can attempt to eliminate their main advantage is by being patient in the markets, it’s an area these programs have a hard time dealing since the people who made them have been instructed to design algorithms that make money, all the time, even whilst they sleep soundly at home in their 10,000 thread-count Egyptian bed linen. Using higher time-frame trading charts and focusing on larger price movements is a sensible starting place for anyone looking to gain a genuine edge over these programs / fat cats.

 

The institutions you are competing against and the computer algorithms they are trading with are fully aware of the fact that classical chart formations offer up huge areas of weakness in the markets. If you were able to see the sheer volume of stop losses in and around, for instance, a double top formation, then it would be very obvious where you would need to move the price to in order to take out all of those stops and make a ton of money in one hit. Be in no doubt, the large conglomerates you are trading against have more than the funds required to move the market precisely into those areas (they are experts at sheering sheep).

 

So, the next tactic you can use to gain an edge over the institutions is to avoid trading in the areas where they expect you to take up a position. When the price is driven into an area which takes out a large amount of stops, it's likely this will push the market into a new price level, not reverse the direction of travel. The stop losses that get hit thrust the price, and often give it the momentum to become quite aggressive in nature, so it is certainly worth bearing this in mind in and around these chart locations.

 

In order to succeed against the robot-rigged stock market you need to outsmart the financial institutions, which on the face of it seems insurmountable, but it's really not. You have your own set of strengths, and that means using your patience, alongside accurately identifying the ideas and concepts behind the computer programs they are using.

 

Try this technique, spend 1 hour examining a chart and coming up with a few simple ideas for a trading robot you would make to rinse all of the newbie traders in the market dry. Ask questions like where would it activate, where will the most stop-losses in the market be, and how can it take the most money from them? Getting a feel for how algorithms operate in the charts will massively help with your trading, so take the time to do this and then see if you can shift your market strategy to focus on which areas of the charts have a high volume of stops, and trade against them (just like an algorithm would).

 

Enjoy this read..?
If you learned something that will genuinely help your trading, then please make a small contribution to show your appreciation and help the site improve and grow into something even better.
Show Support >