On Black Monday, in October 1987, the market plunged over 500 points. It happened because the big trading companies weren’t able to shut down their computerized trading programs. And it could happen again. But thanks to much more powerful computers, it would be far worse.
These powerful computers allow the giant brokerages to process trades in a fraction of a second. It’s called “High Frequency Trading.” And it’s responsible for about 70 percent of the action on Wall Street.
That stinks. It means that those big brokerages see the market before you do. And that allows them to get better gains than the average investor acting alone. (Studies show individual investors do much worse, over the long run, than institutional traders.)
It’s not right.
There is a way to correct this imbalance. IDE’s Steve McDonald, Editor of The Bond Trader, offers the following advice:
1. Avoid the hot stock or trend of the week. With High Frequency Trading, it can turn against you in a nano-second.
2. Avoid day-trading as much as possible. With so many trades now occurring behind your back, it has become dangerous to play the price movement guessing game.
3. Stick with the investing strategy the entire IDE staff has been advocating since day one: a long-term time horizon, high-quality dividend stocks, and quality bonds at a discount. (For specific recommendations, start reading our flagship newsletter, Sound Profits.)