Track Course Progression:
6 - Speculation
Before we get into the meat of this fundamentals and sentiment guide, we thought it would be cool to check out what the real purpose is behind why people would be interested in trading. Of course, for most people the purpose of trading is to make money. However, what we actually do in the business of trading is something called speculation. That’s what we are going to take a look at here.
In this Article:
- Investopedia on Speculation
- Trading is a Business just like any other
- Professional Speculation
- Financial Markets Cannot Function without Speculators
- No Liquidity Killed Lehman Brothers
Investopedia on Speculation
At the time of this writing, www.Investopedia.com which is one of the largest sources online for financial information, defines speculation as the following:
“Speculation is the act of trading in an asset, or conducting a financial transaction, that has a significant risk of losing most or all of the initial outlay, in expectation of a substantial gain. With speculation, the risk of loss is more than offset by the possibility of a huge gain; otherwise, there would be very little motivation to speculate. While it is often confused with gambling, the key difference is that speculation is generally tantamount to taking a calculated risk and is not dependent on pure chance, whereas gambling depends on totally random outcomes or chance”.
Did you follow that? That is a bit of a one sided interpretation of what speculation is. In this guide we will show you how to speculate like a true professional without taking the huge amount of risk that Investopedia thinks speculators take.
It’s true that there are a lot of people who treat trading just like they would treat gambling. This is why trading sometimes gets a bad name in the media. Unfortunately, most people who trade are indeed actually gambling.
Trading is a Business just like any other
The interesting thing is that most people who come to the business of trading don’t know that what they are doing is gambling. They just know that they have been taught a system or trading approach and that this new idea is going to help make them more money. However, just because certain people treat trading like gambling, this does not mean that all forms of trading is pure gambling.
Just like how the approach to trading in this guide is different and unique from other training programs on the market, we will show you how to trade in a way that you won’t ever have to worry about becoming a part of the negative retail trader statistics. We are going to show you everything you need to trade like a professional. You will not ever be unknowingly gambling with your hard earned money if you stick to the principles in this guide.
After learning this material and then practicing it until you become a profitable trader you will have the all the skills necessary to walk into a city trading floor, prop firm or a hedge fund, show them your track record, and be possibly get a job because you will have better trading skills than many other people applying for those same jobs.
Let’s get back to speculation.
There is a professional way to go about speculating without risking your entire financial future every time you place a trade. As long as you are willing to put in the work then this guide is going to help be a part to get to your goal of becoming a successful trader in the Forex market.
For those of you that are or want to be scalpers, day traders, swing traders, or anyone who is trying to make money from the markets speculation is our sole purpose when trading. Speculation simply means that we are trading for profit rather than any intrinsic gain in investment or exchange of goods and services.
Speculators are people that are not conducting any business or doing anything of tangible value other than attempting to generate a profit from the markets. They may be trading on their own account or client funds through a managed account program. Heck, some speculators might be trading on borrowed money…. this is definitely something we DO NOT ever recommend doing. There are definitely plenty of other better and safer ways to go about speculating that you will learn in the upcoming sections.
One big thing to keep in mind is that most, if not all, hedge funds, investment banks, and mutual funds are in fact speculating as well. The only difference is that they are doing it for their clients and not just for themselves like we are. The other big difference is that they are doing it with a lot more money than we are. But hey, over time we can still absolutely make a great living trading our own personal accounts.
At the very least 90% of the trading activity that takes place in any modern market is some form of speculation. Let that sink in for a moment. At least 90% of all trading activity is pure speculation.
Financial Markets Cannot Function without Speculators
It’s very important to understand the underlying reasons that trading exists and where we as speculators fit into the overall ecosystem of the markets. Although we trade for pure profit, we also serve an incredibly important purpose to all markets and to the other participants in those markets.
We as speculators add enormous amounts of liquidity into all modern markets. This is a key point to understand. The liquidity we add is the lifeblood of ALL modern financial markets.
Speculators tend to get a bad name, and to the uneducated person it seems like this kind of trading activity is potentially destabilizing to the financial system. This is completely wrong and nothing could be further from reality. The reality is that speculators provide one of the most important aspects of all markets which is to provide massive amounts of liquidity.
If you were to take out speculators from any modern market the liquidity would dry up overnight. This would make it absolutely impossible for companies and banks to conduct their day to day business at reasonable or fair prices.
The fact is that there would be no way for these companies to do business in an efficient manner which would eventually force them to pass the extra costs of doing business down to the consumer. Basically, without speculators everything would be inefficient and cost a whole lot more.
To understand the role speculators play think about the futures market. What if a farmer had to wait weeks and months for a profitable price at which to sell his meat or vegetables? Obviously, the produce would spoil and go to waste. This would cause the farmer massive financial problems.
This sounds silly because we are so use to having unlimited liquidity in the commodity and futures markets. All of the benefits that these types of people and companies receive are all thanks to us good old speculators. You’re Welcome!
Without speculators there would be no stability in the global financial markets because there would not be enough liquidity to do business in an efficient way.
No Liquidity Killed Lehman Brothers
Think about the former United States listed company stock Lehman Brothers back in the great recession of 2007-2008 for a moment. Lehman Brothers didn’t collapse because there was no business to be done or there were no employees to keep things moving. They collapsed because they didn’t have enough liquidity to support the company for one night, ONE NIGHT! This caused the entire company to collapse overnight. In this case it was the credit lines to fund their overnight essential capital requirements that had no liquidity.
At this historic time the credit markets had ground to a halt and dried up to a point where there was literally no way to do business at all let alone efficiently. Because Lehman Brothers was so highly leveraged up and dependent on the credit markets, not having the necessary liquidity killed them overnight.
The government decided to not bail Lehman Brothers out. However, once they saw how bad this failure was on the economy they decided to start bailing out virtually any large bank or investment house so that the financial system did not collapse. Most people don’t realize just how close we were to total global financial meltdown.
How important do you think liquidity was to Lehman Brothers? A 158 year old company gone, just like that, all because of not enough liquidity in the credit markets to borrow efficiently for one night. We can always go a little bit deeper and talk about the blatantly abusive accounting practices Lehman Brothers was using but in the end it was a lack of liquidity that finished them off regardless.
A little side note from Brandon:
As a little side note; I was prop trading back in 2008 when Lehman Brothers collapsed. I actually watched the stock the morning after the news hit the street that they could not fund themselves. When the stock opened I sat and watched as it dropped by 50% in seconds. That’s not a joke, it was literally seconds.
It was pretty crazy to watch live as the time and sales blotter flowed red with nothing but sales. It just continued to plunge with no buyers in sight. I have so many stories similar to watching Lehman Brothers during the financial crisis. This was one of those times where I watched and traded indiscriminate selling of any stock or share for many months.
All of this highlights how proud you should be to be a speculator and serve the global financial markets in your own little way.
Ok, excellent job friends! You have now completed the primer. Our intention was to get you thinking in a bit of a different way then you may have before. We didn’t say anything earth shattering but we are willing to bet something felt different about it for you. This is a good thing. We need to program the mind to think outside of technicals alone and let in some extra layers of new info that can help you reach for your goals.
Let’s keep up the momentum and smash through the next section!
Next up we are heading into the section dedicated to all things fundamental.