Fire Your Broker--- Learn to Trade

If you have a relationship with a stock or commodity broker, then you have most likely had a not so nice experience of losing money on his or her advice. The broker may be the type that makes a good neighbor, worthy of inviting over for a barbecue. You may consider him a friend. Would he continue to remain friendly if you stopped doing business with him? In friendships, loyalty is usually a good thing. It is a fact that many brokers drain cash from the accounts of would uneducated traders who have no understanding of the basic truths about the trading industry.


It is a known fact, brokers everywhere often engage in a well rehearsed game of bait and switch. They will promise new clients the world, then switch to damage control when losses start blowing out the account. Once the luster is gone, keep the game going, and the commission dollars flowing, for as long as possible before the client quits in disgust or goes off on his own.


There are many styles of brokers, all of them will drain your account. Four of the most common are the pusher, the yes man, the true believer, and the rationalizer. The "pusher" is the most aggressive. He wants you to take X trade right NOW, and will not take no for an answer. The pusher is not above insulting you if you do not do exactly what he wants you to do, when he wants you to do it. The pusher typically preys on naïve or weak-willed individuals who are "push overs" to a dominant type personality.


In contrast, the "yes man" has none of his own ideas- instead, he likes to rubber stamp everything, always repeating what he thinks it is you want to hear. His strategy is to wait until he can detect some hint of opinion, and then agree strongly in the hopes of getting you to place a trade. He is the number one sympathizer, always commiserating, forever testing the waters. The yes man is usually a passive aggressive type who seeks out confident, opinionated clients that like having their egos stroked. The "true believer" is often an old timer and always a fundamentalist at heart, beating a tired drum for the same tired market that had a big move years ago. For the true believer, hope springs eternal- and so does disappointment. The true believer tends to lean on his one sided analysis like a crutch, seeking any tidbit or rumor he can find for reinforcement, and it is his mission in life to find and recruit other true believers.


The "rationalizer" is a consistent loser who always has a good excuse for why his recommendations always go bad. The rationalizer can cheerfully explain away everything except for his pathetic track record, which is never discussed- and like the true believer, "next time" is his eternal refrain. These styles are not concrete- in some brokers one will dominate, while others may display a combination. Of the four, the true believer and the rationalizer are probably the most dangerous, because if persuasive they can do the most damage, keeping you hanging on to hope for months or even years while leeching the lifeblood from your account- eating away at your capital, your confidence and your desire to trade.


The big problem with the brokerage industry is not the calibre of individuals that it attracts. Honest, intelligent, hardworking people are drawn to the markets every day, and brokerage firms are a natural gateway into the financial world. Many successful CTA's and fund managers got their start as stock or commodity brokers. But that is exactly the catch: those who evolve into successful traders inevitably move on to bigger and better things over time. Thus it is no coincidence that the vast majority of "experienced" brokers cannot trade. If they could trade, they would not have stayed brokers. Of those who do not move on as traders, another large portion leave the industry because they are fed up with the internal conflict and sense of moral compromise- the frustration of seeing clients lose money day in and day out without fail. What does this leave behind?


The industry also has a conflict of interest built in to the payment structure. CTA's and fund managers have interests in direct alignment with their clients, because they are paid as a percentage of trading profits. They only make money if the client makes money. With brokers, there is no such arrangement. They take their commission cut whether the advice is good, bad, or worse than useless. It is no surprise that when it comes to measuring broker performance within the industry, the entire emphasis is on commission generated, as in: "he generated a two million in gross commission last year- he is a TOP NOTCH broker." The earnings or losses (usually losses) of clients is not even discussed! The broker always collects whether you win or lose (and in fact expects you to lose, be it sooner or later, partly due to his high costs). Therefore, it is his job to make you trade as much as possible, with no regard to your best interests, so he can get his cut before your account is blown out. Keeping this in mind, what percentage of recommendations would you guess are actually based on solid analysis and firm conviction, rather than the simple desire to bait a hook that draws in commission dollars? Zero would be a cynical answer, but sadly close to the truth.

The big lesson here is that if you are going to trade, you cannot substitute someone else's experience for your own, nor expect someone else to make up your mind for you. You must learn to trade, and dictate your own success or failure. This will eliminate the need for a broker at all!