The Stock Market is Rigged

To absolutely nobody’s surprise, Michael Lewis, the author of the book “Flash Boys,” claims that the stock market is rigged. While it’s always been rigged, “Flash Boys” explains how it’s been rigged by high-frequency traders, also known as algorithmic traders who use computers to optimize stock trading. This basically means that technology and clever algorithms are more adept at rigging the markets than the traditional stock market manipulators of the past.

Basically the idea behind algorithmic trading involves these basic steps. First, computers follow systems that have been statistically proven to succeed. The trick is that at any given time, the right conditions for any system to succeed will change, but if you slavishly follow the right system, you can make money in the long run even if you lose money in the short-term.

Some of the ways to predict the stock market involve chart patterns, moving averages, and candlestick charting. The basic idea behind any system is that it gives you a statistical advantage over just randomly picking stocks and hoping that they might go up.

The stock market is out of your control, but the two things you can control are:

  • When to buy
  • When to sell

Stock market systems optimize the time to buy and the time to sell. You want to buy at a time when your system predicts the stock will soon go up. You want to sell when a stock starts sinking. That can be right after you’ve made a quick profit or to cut your losses.

What most people do is that they buy a stock and hold on to it even as it drops. The smart thing to do is to cut your losses as soon as a stock drops a certain percent such as 5%. By always cutting your losses, you preserve your capital. By never cutting your losses, you’ll always risk taking massive losses.

Through clever programming, it’s possible for smart people to outwit the old world of financial stock manipulators who relied on rumor to manipulate prices in their favor. If you want to match wits with the stock market, you can. Just read books likeĀ “Flash Boys” to learn more about algorithmic trading. Even if the stock market is rigged, you can still make money off it by rigging it in your favor.

There will always be corruption and manipulation in any industry. The trick is knowing that it exists and then making sure you’re on the side that’s always winning.

April 3rd, 2014 by
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