I’ve openly admitted to using Robinhood. And I still do… but that’s because I know how to use it.

I’m a skeptic by nature. When I was 13 and my friends were reading Twilight and Harry Potter, I was reading Nineteen Eighty-Four and Brave New World.

I’ve always asked questions. I prefer logic and reason over appeals to the heart. And I never trust advertisements.

That’s one reason why I like being in the financial newsletter business. There’s so much BS out there, it makes it ridiculously easy to stand out. You just have to be real with people, and that’s what we try to do.

This industry is going through a lot of changes. Last year, more new investors entered the market in five months than they had in 12 years.

These new investors are very inexperienced. And the world is littered with bad actors who are more than happy to take advantage of these people. Most of them aren’t even aware when the wool is being pulled over their eyes.

Sometimes those bad actors are obvious — like when you see them cruising around on a yacht shooting money guns into the air.

Other times, they’re not. These bad actors like to position themselves as the hero to new investors…

Which brings me to the real meat of what we’re talking about today: Robinhood.

When Robinhood launched its brokerage app in 2014, it was revolutionary. It appealed to younger demographics who traditionally wait much later in life before investing in the stock market.

And the trades were free. This was virtually unheard of at the time. Most brokers were charging at least a few bucks in commissions for stock and options trades.

Now, virtually every broker offers commission-free trading because of the revolution Robinhood started.

Sounds great, right? What a fitting story for an app called Robinhood!

But Robinhood is no hero…

Steal From the Poor, Give to the Rich?

I’ve always enjoyed the mythology of Robin Hood (the story). One of my favorite films as a kid was Disney’s Robin Hood (1973).

Robinhood, the broker app, is clearly playing on this mythology. But the devil has a forked tongue — says one thing, but means another.

Robinhood isn’t “bringing the power of the stock market to the people.” It’s taking advantage of inexperienced investors who don’t know what they’re doing.

I felt the need to address this today after openly admitting to using Robinhood.

Some folks out there use Robinhood in such a way where they don’t even know they’re getting screwed. And there are a few key things you can do to prevent this from happening.

The first thing to know about Robinhood is that its business model is selling your data. The trades are free, so clearly they don’t make money by serving you. But they are making it somewhere.

Specifically, they make money by selling your trade information to market makers.

You see, brokers have two options when they receive an order from you. They can process your order directly through a stock exchange like the NYSE or Nasdaq. Or, they can direct your order to a third-party market maker.

Market makers are high-frequency trading firms (HFTs) like Citadel Securities and Virtu Financial, among many others.

The way these guys turn a profit is by “making the market” — filling customer orders. So if you enter a market order, and it comes across the desk of a market maker, they could potentially fill you at a higher price than you expected, because markets move quickly. In these cases, the difference could be split between the market maker, who fills the order, and Robinhood, who gave them the order.

So what does this all mean in practice?

To put it simply, don’t expect to get good entry prices if you’re using Robinhood or another broker that sells your order flow data to HFTs.

Four Guidelines for Getting the Most out of Robinhood

People think Robinhood is “free” because they don’t charge a commission. But it is still a business at the end of the day. They get you in other ways. Namely, by selling your order data and taking advantage of bad orders that inexperienced investors are placing.

Make no mistake, you’re still paying… you just can’t see it.

I’ve experienced this firsthand. If you enter a limit order at a broker who treats its users like customers, the broker will fill you at the best available price.

More often than not, Robinhood will fill you at the limit price. So you overpay for the stock or option you’re buying.

Why? Because you’re not their customer… The HFTs are.

The same goes for the stop-loss function. If you enter a stop loss — which is designed to protect you from volatility — Robinhood will often sell your shares at the stop price even if the stock wasn’t being quoted that low.

(That said, I am not a fan of stop losses. More often than not, stop losses lead investors to sell during periods of volatility when they should be buying, not selling.)

There are ways to use Robinhood effectively. I still use it as my primary brokerage account. But you need to be aware of the pitfalls…

Here are four main things you should keep in mind to use Robinhood effectively:

  1. Never use market orders. If you place a market order, Robinhood may fill you at the highest possible price.
  2. Use limit orders CORRECTLY. If you place a limit order that is well above the stock or option’s quoted price, you might as well just be placing a market order. When you set the order too high, you are saying you are willing to pay that much.That’s why I set limit orders very close to the current price. If the order doesn’t fill right away, I monitor the position. I may cancel the order and set the limit price a little higher if necessary.
  3. Avoid stop losses. When you enter a stop loss, you are giving Robinhood permission to sell your shares and contracts for a lower price. Stop losses are good in theory, but should only be used at brokers that you are directly paying for and that don’t get a majority of their revenue from market makers.
  4. Robinhood is for speculating, not serious rules-based trading. Beyond simple limit orders and stop losses, Robinhood doesn’t offer many tools to help investors and traders automate their trading with systems.

I don’t mind it, because as I’ve said before, I’m not a rules-based trader, I’m a discretionary trader. This style of trading is appropriate for some, but it’s not the kind that trading experts like Mike and Chad recommend.

This all being said, it’s not impossible to make a ton of money trading on Robinhood. I’ve personally used the platform successfully over the past year to make more money than I could’ve even imagined a few years ago.

Just be aware of the pitfalls. Be aware of how Robinhood’s business model works. With this knowledge, you’ll know how to avoid Robinhood’s dirty tricks and get the trading experience you deserve.


Chris Cimorelli
Chief Editor, True Options Masters

Chart of the Day:
A Bullish Sign for HOOD Stock

Turn Your Images On

(Click here to view larger image.)

Since Chris covered Robinhood today, I thought it only appropriate that we take a look at Robinhood (HOOD) stock.

And HOOD is showing us a clear and pretty dependable momentum pattern to trade…

Take a look at the MACD momentum indicator at the bottom of the chart. The blue signal line is about to cross over the longer-term orange momentum line. Once these crossovers happen, momentum tends to shift positive for a period before cycling back into negative again.

We can see the last time this happened, HOOD gained almost 14% in just a couple days. If HOOD can carry through with its early gains today, that may be enough to shift the short-term momentum to the upside.

If it makes a similar move this time around, we could see HOOD trading north of $50 sooner than we expect.


Mike Merson
Managing Editor, True Options Masters