Losing investors often blame market manipulation as the primary reason for their lack of success. Pointing at the insiders or massive market players, failures always find a reason for their investing misfortune.
Winners, on the other hand, understand that their success or failure rests purely on their market knowledge and ability to execute on the experience.
Winners are always working on building their knowledge base and skill set to better understand how the market works rather than merely complaining.
Grasping how the market works forces one to accept brutal truths about life. One of these brutal truths is that whenever money is involved, there will be those who try to get an advantage by either legal or illegal means.
Often legal, but sometimes illegal, financial market manipulation is rampant in today’s stock market. Understanding market manipulation provides you an edge over those who merely ignore or deny it.
It’s Always Been This Way
Market manipulation is part of the game. Stories of the original stock trading icon Jesse Livermore launching “bear raids” and the Hunt Brothers cornering the silver market to today’s stock “spoofing” and VIX rigging abound where ever active investors congregate.
The best way to think about manipulation is to accept it as part of the market structure. As retail investors, we cannot control or change how the big boys play the game. Understanding that manipulation can work for or against you, depending on your position, helps remove worry about these sometimes unethical or illegal practices.
Also, it is critical to understand that stock market manipulation is mostly always in the concise term. In other words, it has the most adverse effect on day traders and other short-term investors. Make no mistake, long-term concentrated manipulation can and does take place. However, investors can definitely profit from long-term manipulation, as it results in price trends that can be exploited.
The best way to protect yourself from stock market manipulation is to think long term. Understanding the types of manipulation can allow you to make better decisions when investing.
Here are five ways stocks are manipulated:
1. Fake News
The term fake news has become very popular recently. The Trump Administration, in its efforts to “drain the swamp,” has exposed the many ways media manipulates the news.
Large or media-savvy stock market players have long attempted to spread the fake news about a company or even the entire market to make it move in their favor. The shady world of penny stock promoters is the classic example of fake news being used to manipulate stock prices.
Protect yourself from fake news by always confirming the source of the news before acting upon it. Be warned though that the time drain from this can result in your missing the move.
One way I use fake news to profit is to fade the initial move. This means to wait for the stock to spike higher or lower based on the dubious news then enter a trade in the opposite direction. The fading tactic is also quite profitable if the news is real, given the traditional wisdom “buy the rumor, sell the news.”
2. Pump And Dump
A derivative of fake news, pump and dump manipulation is done via mass email or even regular mail. Usually the province of penny stock promoters, pump and dump manipulators send out millions of glowingly bullish proclamations about a company to attract buyers.
The “pump” occurs as the retail masses buy into the stock, resulting in the price and volume spiking higher. Once the regular investors are committed to the stock, the promoters sell their shares (“the dump”), causing the price to plunge.
The best way to protect yourself from a pump and dump is to avoid buying stocks that are rocketing higher. Nimble traders can profit from pump and dumps by fading the move higher as mentioned in the last section.
Understanding that a pump and dump is taking place and fading the move is a time-honored way to profit. Just like with fake news, wait for the price spike to start rolling over on the chart and short! Fading the move places you on the same side as the pump and dump promoter, virtually guaranteeing a winning trade.
3. Spoofing The Tape
Spoofing, also known as layering, the tape is when sophisticated short-term investors place orders in the market with no intention of having them filled. Other investors see the large orders waiting to be executed, believing that a market whale is trying to buy or sell at a certain price. Therefore, the investor places their order at the same level to buy or sell.
Seconds before the market trades at the price of the large order, the order is pulled from the market, and the retail investor’s order is filled. After the spoofer pulls the order, the market drops, resulting in losses for anyone unfortunate enough to be tricked into buying.
Avoiding short-term trading is the best way to protect yourself from spoofing manipulation. If you do short-term trading, over time you will learn what spoofing looks like, and thus be able to capture profits along with the spoofer. However, this type of trading is only for the most sophisticated and skilled investors.
4. Wash Trading
This tricky form of manipulation is when a big player buys and sells the same security continually and nearly instantaneously. The rapid buying and selling pumps up the volume in the stock, attracting investors who are fooled by the spiking volume. Once again, this form of manipulation does not affect long-term investors.
5. Bear Raiding
Bear raiding is when a large player forces share prices lower by placing large sell orders. The price plunges as stops are hit, adding to the selling.
Risks To Consider: Thinly traded stocks are prime candidates for manipulation. Avoid investing in low-volume names.
Action To Take: Be alert to manipulation when making investing decisions. The best way to protect yourself from the manipulators is to invest for the long term.
— David Goodboy
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Source: Street Authority