Retail brokers and other companies that offer different services have also taken advantage of this, especially the lack of our qualification to effectively manage our capital and well-considered decision-making.
Trading and investing is like any other profession, requires education, a good period of learning, practice and experience. It’s even one of the most competitive activities in the world, yet it’s often treated with a “lottery” mentality, or with “strategies” on graphics that have nothing to do with a professional process that brings together a lot of other elements.
Unfortunately we are totally immersed in this bubble of marketing and seduction (brokers, platforms, applications, diplomas, binary option, alert services, robots … etc.) that makes us move away from the reality of things, and who does not reports that distraction.
The goal of course is to ‘shifter’ the attention of the individual trader to what is marginal like the (spread, the calculation by centimes of the commissions, details of the platforms, use and parameterization of the technical indicators … etc.).
What I personally see as very dangerous is the large number of confusions and misconceptions implemented in our heads compared to professional traders and the approach taken by smart money, perpetuated all the time by brokers and educators who operate with a conflict of interest. We’ve talked about a few in the comparison article between private and professional traders, for example bargain only in the short and very short term (as in the 80s and 90s) by believing that the pros in the banks of investments are doing the same thing manually, which is only market making performed by algorithms and supervised by these traders in order to generate commissions, while they manage the money of the bank (and its investors ) by developing portfolios for positions over a few weeks or months (which is the same for hedge funds, eliminating HFTs).
Brokers want their customers to open and close dozens of positions a day, with the maximum size possible without understanding anything about fundamentals and what makes prices move, differentiating between the noise of the term price and the fundamental vision, in making him believe that with their “professional” platform and free or paid technical indicators, they can compete with the “pros” and win efficiently by using some techniques on the order book and market profile to see the liquidity, not to mention that volatility and opportunity exists all the time.
Why should we be interested in this?
The reason we try to understand the structure and the mechanisms of the interaction between the broker and the particular trader, is simply to know at what level the latter falls in situations where he has less probability of winning, and explain which push brokers to perpetuate a certain way of approaching the market.
Before entering any business, you have to do a study of the sector, to understand how the industry works, which entities dominate and which ones lose, and how to avoid falling into the same mistakes as others. It is practically done on all business, why not in trading ?!
The brokers generally realize their winnings through the opening and closing commissions of the positions (round trip), so the number of these positions is very important as well as the volume (the broker wins customers who negotiate the most contracts and with larger volumes).
As you know, 90% of private traders lose in the markets, it means that the broker can simply take the opposite side of the positions, but you have to know something very important, because this broker lends money to the trader (on the opposite side) through the leverage effect, and takes a risk in offering a very large liquidity.
So what drives the broker to lend these sums through liquidity (50 – 100 – 200 leverage) to the trader to take important positions which he is the counterpart? and where does this money come from?
The money comes mainly as credit from an investment bank with a certain rate, on which the broker adds its margin by lending it to these customers. So this is a second source of income for him.
The broker offers this leverage effect in relation to what we have already mentioned in relation to the probabilities of losses, but also in relation to the probability of having a certain daily volatility of an asset such as forex. Because the broker, and as you probably already know, separates customers according to their performance and the risks they take. So on the so-called A book, it will put the losing customers, who constitute the vast majority of course, and for which he will take the opposite side of their positions, without hedging on the real market, and the B book which constitute the minority, and for which he will take the opposite side of the trade and at the same time hedger the position on the real market.
That’s why they always put forward the major peers who are not volatile but liquid (also for CFD on Apple, FB, Coca-Cola … etc.) Because it gives them the opportunity to ‘get in and out of their positions quickly (less risk).
For simplicity, if I am the broker, I take the opposite side of the position of my client (who loses 90% of cases, who frequently opens and closes positions on an asset that does not move, using his money that I I have deposited in one of the investment banks, and this allows me to provide him with liquidity with a margin to pay and a larger gain when he will lose on his trades, using the money he has deposited in this bank as a guarantee in case he loses, which means that it is safe for me, and without counting the spread, is not this business profitable ?!
The only difference between market makers and ECNs (Electronic Communications Networks) at this level is that on the second the broker does not take the opposite side of the trades, the positions pass to find the counterpart in the liquidity providers, adding commissions, with spreads that are generally lower, but which are variable, and which widen during periods of high volatility (especially during news), which can result in slippage and poor execution. So looking for an ECN broker for tighter spreads, but trading during news, and daily announcements to look for volatility, does not make sense! Having direct access to liquidity does not mean good execution.
But whether it’s Market maker or ECN, the result is the same, the broker wins over the accounts of people who trade frequently until they create their accounts to replace them with others, or they come back again with the same mentality. This is why these brokers always push ahead with day trading, scalping and other ideas whose goal is to encourage traders to make their decisions as quickly as possible.
The choice of the broker is not as important as the approach taken to negotiate the markets. This approach that is downright changed by these entities using their “dolls” analysts that they try to present themselves as professional traders and who give daily news and information that have no real utility (market noise ), but always used to tell us that there is something important every day to take positions.
Brokers also do not save money generated on all advertising and sponsorship of football clubs … etc. to try to give a certain impression and prestige (as if it has an interest for the trader), and in other sides on educators ” fake professional traders ” who recommend the broker, and some work with contracts by introducing broker contract, and doing “educational” seminars and webinars showing people how to trade like professionals.
Not to mention some YouTube channels that are shown as educational, but that operate as advertising and marketing agencies for these brokers by naming them “interviews” and putting their ads on their homepages.
The purpose of this article is to have a more realistic view, and understand what brokers and entities with a conflict of interest want to be done, to simply do the opposite (trade less frequently, borrow less, pay fewer commissions), and stay away from all the noise and details that are not important (spreads, parameters and platform usage,) that make up less than 1% of trading, and see the broker and its platform as a execution tool, nothing else, not a source to have educational content.