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In this post we will look at The Financial Crash of 1987 and the pattern of all crashes that have been and will come in the future.
As my pervious article was about the 1987 crash, I thought I would explain what actually happened in that crash and how it affected some of the people I know who were trading on the floor in Chicago in the SP500 pit.
As people who have been on this blog for some time will know and understand, in general, a professional trader will mostly does the opposite of what an inexperienced public trader does.
To explain. If the majority of public traders are long, the professionals will mostly, by implication be short. Someone has to be on the other side of all those losing trades after all. If we equate the fact that the public nearly always lose money, we need to ask ourselves who makes the money or at least where does the money which is lost by the public traders actually go?
Well contrary to most people’s perceptions trading, any type of trading on a regulated market be it stock market, Futures exchange or commodity exchange is not a zero sum game. Think about it for a minute, if you take the other side of my trade and I lose USD 10K, you win the 10K but you will also pay brokerage to open and close your trades, as I will. Additionally we will both pay slippage when entering and exiting those trades. In essence all the associated actors in the trading community other than the people who actually trade themselves need to be paid out of the trader’s costs. They are indeed paid by the traders themselves – from their loses and from their winnings. Most traders might not see it like that, as the don’t see the money drip feeding away from their account , but trust me it does and believe me when I say that trading is not a zero sum game. It isn’t.
To return to the original question, where does the money from the losing trades go? Well apart from the brokerage and slippage fees mentioned above it goes to traders who are more skilled than the public – namely the professional traders who work for hedge funds, banks and large trading houses.
The premise is set then. We now know and understand that money in the market place passes from the weak hands – public traders – to the strong hands. And this is set in stone as commercial trading houses are profitable year after year whereas most public traders or weka hands last anywhere from three to nine months in the market if they are lucky.
What happened in the 1987 crash on the floor was this. As mentioned ,when the public start to sell and the telephones start ringing the floor traders start buying. After every little flurry of selling eventually the selling subsides and the inventory has been mopped up by the floor traders. The natural progression of price at this point seeing that ther are no more sellers is that price rises. And so the sequence starts all over again.
The problem that happened in 1987 was that the phones did not stop ringing and the selling simply did not stop.
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