How markets get manipulated (and how you can do it too)

An email arrives from a worried reader…

He’s been watching an online trading video where it was announced – shock! – that the financial markets were being manipulated.

That sometimes, when the price went up, it shouldn’t really be going up.

And when the prices went down they shouldn’t really be going down.

The video said these price moves weren’t fair. That they didn’t reflect what the market should be doing. And that ‘normal traders’ weren’t ready when the moves happened so their results were being affected.

Of course, the video then moved into a sales pitch for the magic solution that’d let you navigate these choppy waters!

But it always makes me shake my head in wonder when I hear stuff like this.

It’s wasn’t my reader’s fault. He was just doing some research and was ready to take on board whatever this particular ‘expert’ had to say.

But markets are ALWAYS manipulated.

Always have been and always will be.

In fact, they are manipulated by their very definition.

The current market price is simply a reflection of consensus opinion: if you take all the buying interest, and all the selling interest in any given market, throw it all into a pot and let it settle for a moment, you’ll arrive at a current market price. The current market price is the point where the buying and selling forces are temporarily balanced.

If you add a bit more buying pressure the balancing point changes. The price moves up.

And if you add a bit more selling pressure the price moves down.

It means every single order hitting the market manipulates price to some degree.

You are a market manipulator and so am I. I manipulate the British Pound every time I place an order in a GBP market.

Now you might not see an earth-moving effect at the size you and I trade at, but the principle is exactly the same for us as it is the trading titans of the hedge fund world.

So although some quarters call foul when markets move in a particular fashion, that it is a deliberate attempt to trigger stop-loss orders or whatever, the market will be what it will be. The market tells us what the fair (current balancing point) price is. It doesn’t work so well the other way around.

I think it helps to have a healthy and open minded view on market manipulation. The markets aren’t there for our personal benefit. There are forces at work with HUGE amounts of money to throw around and if they can use it to gain an edge somehow – ethical or otherwise – you can bet they will. That’s just how the world works.

So accept how the markets operate. Embrace it. And don’t waste valuable time and resources projecting blame or trading on unrealistic expectations. Keep working on the ‘inner game’ of trading and use what you learn to your own advantage – that’s the path to long-term success.

Until next time…

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