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Financial Speculation: challenges in the 21st century

Financial Speculation: challenges in the 21st century

April 22, 2019

As the Internet penetrates more and more corners of the globe, millions of people join the network daily. Suddenly, they are exposed to new industries and join online communities.

The online trading community is one of the largest in the world. Only a few decades ago, trading wasn’t for anybody.

The most active players were institutional investors (i.e., hedge funds, commercial banks, pension funds, etc.) and some speculators with enough resources to cover the high transaction costs (e.g., Soros, Paul Tudor Jones).

But the Internet leveled up the field, and now, with as little as a stable internet connection, anyone can access the largest market in the world: foreign exchange, also known as Forex.

People search for alternative solutions to complement their income. What is more comfortable than trying to do that from the comfort of your house, trading online with the help of a broker?

Brokerage houses nowadays don’t offer access only to the currency market. Instead, from one single account, traders buy and sell multiple financial assets.

From oil to gold and other commodities, from CFDs (Contracts for Difference) to ETFs (Exchange Traded Funds), the trader has plenty of fast-moving markets to choose from. But the goal didn’t change all these years. That is speculation on financial markets.

Financial Markets in the 21st Century

The decisive moment that changed the financial landscape happened in the early 1970s. With the decision to give up the gold standard, the United States allowed the dollar to free-float against other currencies.

The resulted market, the interbank market, quickly became of interest to financial speculators. As currencies make wild moves against each other, the opportunity for speculation arose.

The art of speculation is to profit from market moves. Either buying or selling, the difference between the entry and asking price determines the win or the loss of a trade.

Brokerage houses act as intermediaries. Against a commission, they provide access to the market.

The Internet came and changed the brokerage industry forever. As a matter of fact, the Internet and the Personal Computer (PC) are responsible for the rise in online retail trading as we know it today.

Challenges Ahead

While it is a clear opportunity for everyone involved, financial speculation bears risks. Not everyone understands the complexity of financial markets and what, indeed, moves prices.

The currency market, for instance, is the largest in the world. But all the retail traders in the world barely make up to five or six percent of this market.

In other words, if prices move, they don’t move because the average Joe sold or bought a currency pair. But they will move because of bigger players opening or closing trades.

To make it in this world means one needs to understand the global context. Currencies represent the strength of their respective economies, and changes in the economic landscape affect the value of a currency.

Central banks dictate the interest rate and monetary policy for a currency. They analyze the economic data from the past (typically six weeks) and set the policy for the period ahead.

When they change the monetary policy, central banks also use unconventional policies, like buying bonds. Someone effectively does that, and the actions of such primary brokers affect the overall financial markets.

The complexity of financial markets, therefore, is ever on the rise. It makes it difficult to speculate as financial markets tend to have an increasingly direct correlation.

Thus, traders from all markets (bonds, options, stocks, currencies), end up watching and interpreting the same things: central banks interest rate decisions, economic data from major economies in the world, elections that change the geopolitical conditions, etc.

The Rise of AI

Perhaps the most important thing happening right now is the rise of the AI (Artificial Intelligence). Before thinking of robots looking like humans, start imagining AI that trade. If there is one industry already dominated by algorithmic trading, that’s the financial markets speculation.

Robots dominate financial markets as we know them today. Institutional players have quant machines, or robots able to open and close thousands of trades per second.

Armies of programmers, mathematicians, and physicians alike work to secure the best possible trading strategy that yields the highest profit. The advantages of automatic trading far outpace manual trading. With one exception: the free will, if you want, or the ability of humans to filter all the upcoming information. Robots can’t, yet. But AI is set to change that too.

Already AI makes progress in plenty of other areas (e.g., chess, go). Online trading is just another industry to conquer.


Markets drastically changed in the 1970s with the emergence of what we know now as the interbank market. Such things as mergers and acquisitions, for instance, are enough to move the currencies and to add to the market’s volatility. As retail traders rarely understand the M&A market, it is just another unknown to the fundamental puzzle.

The Internet and the PC changed the industry after that. And, today, the trading seems ready to change yet again.

Not that the human traders will not have a place on the trading table. Only that the competition becomes more fiercely and speculating on market moves increasingly challenging.

Computers are also responsible for the dry in volatility. As trading algorithms open and close positions so often, the markets are kept at “bay” for a long time. Thus, trading opportunities (market anomalies) appear less often.

To make it as a retail trader one needs a combination of technical tools, programming ability, and fundamental analysis. Above all, one needs time to spend in front of the screens, to understand how markets work and function.

Trading as a hobby will slowly be replaced by trading for a living. Big trends don’t appear so often on the markets anymore. Instead, the focus should be on scalping and, at best, swing investing.

It means the trading volumes will increase too. In the end, the more we, as humans, follow the robots, the more chances we must profit from the markets.

Welcome to the 21st-century financial speculation!

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CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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