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Forex Price Manipulation

Transcript of CCT December Magazine

  • Market beating forex expertise and news

    WWW.COMPLETECURRENCYTRADER.COM | December 2013

    Forex Price Manipulation

    Are the major banks colluding to manipulate price against their clients?

  • COMPLETE CURRENCY TRADER MAGAZINE | December 2013 1

    Attitude: Practice Makes Permanent

    We all know practice is supposed to make perfect, but is that really what we should be aiming for? Should practice really be about forming habits and making our skills become permanent?

    Trading Psychology: Cognitive Dissonance

    When our beliefs and expectations clash with the reality we experience when trading, our minds are faced with a decision that will make or break our trading forever. What choice will you make?

    Inside-Out: The Interbank FX Price Fixing Scandal

    Price manipulation, interbank collusion, front running, and price spikes. The banks are under investigation and top traders have been suspended. Is this the next scandal to hit the financial community?

    Analysis: The Mechanics of the Trend

    Why is the trend your friend, and how do you know you can trust it and have confidence in it? We examine the behind the scenes mechanics that create trends and keep them running.

    Profile: Bill Lipschutz

    The Sultan of Currencies. The stay at home trader ranked in the top 5 best forex speculators on the planet.

    December is here and the festivities are about to start. The team at Complete Currency Trader wish you a very Merry Christmas.

    As always, weve got a varied selection of articles for you this month that we hope will give you a wide range of topics to delve in to before you end the year.

    Our trader psychology spread investigates one of the most prevalent issues affecting traders, yet one which is almost never discussed. This is the perhaps the most inherent obstacle in front of each of us and an aspect we must all face up to if we wish to finally succeed.

    We of course also have our usual feature profiling a top currency trader, and this month we look at Bill Lipschutz.

    Our main feature and the topic of our front cover, is the recent and ongoing scandal regarding price manipulation on a massive scale and collusion between the top banks to fix prices in the FX market. We investigate what the alleged offences are, and more importantly what the consequences are for retail traders like you.

    Its another packed edition of our magazine and we sincerely hope you find it an informative and educational read.

    CONTENTS

    Trading reality, not the fantasy.

    From the Editor

  • COMPLETE CURRENCY TRADER MAGAZINE | December 2013 2

    Forget about perfection! Practice is all about permanence. Successful traders who survive over the long term, have developed good skills and habits that help them perform and profit in the market, under all conditions, day after day and year after year. The term successful can only be applied to traders who have longevity - a track record of success. Any fool can have a winning trade, or a winning week, or even a winning month. There is absolutely no skill involved in any short term results. If you took 1000 chimpanzees, and let each of them randomly take 10 trades, statistically one of them would have 10 wins, one of them would have 10 losses, and the others would be somewhere on a sliding scale in between.

    Can we say the chimp with 10 wins was a good trader, and the one with 10 losses a bad trader? Of course not! Both chimps were clueless and without skill. The wins & losses were merely the result of short term mathematical probabilities like that of a coin flip, and statistically at least one chimp was going to get 100% winners not from skill but from chance (luck). Over the long term however, its a very different story. Bad traders cannot survive for long on luck. As time goes on, random results such as a coin flip or those trades executed by bad or inexperienced traders, would fall back to the mean (the half-way point). Any trader who performs better than the mean and the accepted standard deviation either side of it, is clearly demonstrating a real skill and talent. Traders who have consistently generated profits from the markets over decades, have certainly performed beyond the mean. Statistically theyve proven they have genuine skill rather than luck. How have they achieved this? How did they acquire such high level skills?

    Practice! Practice! Practice! As Aristotle said: We are what we repeatedly do. Excellence then, is not an act, but a habit. Successful traders achieve success by repeatedly doing the same thing over and over again. They have an edge, they have a system, and they repeatedly execute that system day after day, month after month, year after year. They practice the same action until it becomes a habit, and that habit becomes permanent. There is research made popular by Malcolm Gladwell in his book Outliers, which supports the 10,000 hour rule. This rule claims that the key to success in any field is, to a large extent, a matter of practicing a specific task for a total of around 10,000 hours. And so this may be considered the secret to success. It is not innate talent, and it is not above average intelligence. It is in fact merely the determined pursuit of practice. Practice of a specific task until that task becomes a permanent skill. This is good news, as anyone with the commitment to practice, can ultimately achieve success!

    Attitude: Practice Makes Permanent

    A festive cartoon for December

  • COMPLETE CURRENCY TRADER MAGAZINE | December 2013 3

    Cognitive dissonance is a psychological term used to describe the discomfort a person feels when they simultaneously have two conflicting beliefs (cognitions). The theory states that humans like to hold all their beliefs and experiences in harmony and avoid disharmony (dissonance). An extreme example would be when a person believes the world will end on a certain date, but is then presented with the conflicting reality of the world still being here the day after. Reality doesnt match their beliefs and so they naturally experience emotional discomfort.

    When we experience this conflict and discomfort, our minds will immediately try to re-establish harmony by altering our beliefs and attitudes and by justifying our actions and behaviour. Ultimately we all want our expectations to meet reality so as to give us a sense of control. We all experience cognitive dissonance on an almost daily basis. In everyday life it can be fairly harmless and even amusing when you recognize it in yourself, but for traders it can be disastrous.

    To lay the foundations of how this manifests itself, here are a few every day examples: Sandra is on a diet to lose weight. She knows fast food burgers are unhealthy and fattening (belief) but she eats one anyway (reality). Her actions conflict with her beliefs so she justifies the action by saying she will do more exercise to burn off the excess calories, or that she only had a small breakfast anyway so it all balances out, or that shes been so good at sticking to the diet to date that she deserves a treat. Michael just bought a new car but paid more than he should have. He knows he cant really afford this (belief) but he bought it anyway (reality). To re-establish mental harmony, he justifies his action by telling himself this car is less likely to break down than a cheaper one and will save him money in the long run. Does that kind of behaviour sound familiar? You can no doubt think of many other situations where people display this kind of thought process and you may even be able to see it in yourself from now on. Understandably this is a complex topic with many angles to explore, but for ease of application to the trader mind set it is worth remembering it in basic terms of: when reality doesnt meet expectations.

    Trading Psychology: Cognitive Dissonance When reality contradicts our beliefs and expectations, traders face the ultimate psychological challenge

  • COMPLETE CURRENCY TRADER MAGAZINE | December 2013 4

    How does this apply to traders? The overwhelming majority of aspiring amateur traders come in to this profession with grossly unrealistic expectations. To list but a few: Trading can be learned quickly. Returns are large, fast & regular. Short cut to wealth and riches. Steady reliable results every day. Can quickly quit my job & work from home. Anyone who has ever attempted trading has quickly experienced first-hand that none of the above are true. This instantly creates a conflict between what you believed and what you experienced, and so your mind quickly attempts to erase the discomfort and restore harmony. The sensible and logical thing to do would be to admit and accept that your original beliefs were wrong, and then re-align your beliefs to accurately reflect reality. However, admitting you were wrong, or that you made a mistake, is in itself an emotionally painful thing to do. No one likes to admit they were wrong, so the easier and faster solution is to simply try to rationalize and justify your initial belief. To basically make excuses for own mistake in order to make you feel better about it. It doesnt matter that your belief was wrong and continues to be wrong, so long as you feel ok about it. Needless to say, th