How to Trade and Invest like an Institution
There are three types of traders that make up the financial markets from trading and investing. Each type of trader will be unique in many ways regardless of which category they fall into. Some characteristics that make each trader unique include their trading strategy, risk tolerance, style of trading (intra-day, swing, long-term) and ability to control emotions. The majority of traders around the world are going to be known as retail traders or as I like to call them homegamers.
1. Retail
Traders who hold very little influence on the financial markets due to a lack of liquidity. Some have more liquidity than others however very few trade as much as a commercial or especially an institutional trader. Many retail traders work from their own home or small office making this type of trading very appealing.
2. Commercial
A good example of this type of trader would be a pension fund manager. Commercial traders tend to have more liquidity than retail traders however they are not as aggressive and do not attempt to change the financial markets, instead they typically follow the current direction for conservative profits.
3. Institutions
These traders consist of banks and investment firms. The institutions are the most influential of all and cause large reactions of price movement which go on to form market trends and direction. The primary reason for this influence is large amounts of liquidity and as I always say, "he who holds the most wins!"
Follow the Smart Money
This leads me to one of my favorite analogies. I like to think of the institutions as a shark (absolutely no pun intended and this will make sense after the analogy). The shark swims around the ocean and is feared by most creatures so it is known that a shark has major influence on what occurs. A pilot fish follows the shark and eats the parasites off him, in return sharks do not eat pilot fish and protect them from other species because most others do not want to be anywhere near the shark so they do not get eaten. In our analogy we are the "pilot fish". As a retail trader it is most common to have less liquidity than most any institution as well as commercial trader which makes us the smallest of the species. Is this a bad thing and can it hurt us in the markets? No. The key is being humble enough to admit that we are just a little fish and do not mind eating off of the shark (institutions) in return for protection.
So now that we have compared ourselves to a fish how does this information help us? Knowing who holds the most money and influence on the markets tells us who we want to follow. So by comparing the institutions to a shark we know that they are feared and thus we want to be as close to them as possible.
Location, Location, Location
To do this it is key to be able to identify what, when and where they are going as well as coming from. Using pure price action we see there are footprints left by the large amounts of orders that are placed. By patiently waiting for these levels it becomes methodical and adds extreme probability to your trading and investing. Due to the fact that price cannot lie, each movement is very important because it tells us another piece of information that we may not have been privy to otherwise. If you can learn how to identify these areas on a price chart with a high level of accuracy you are now following the institutions. Most retail traders fear them due to the ability to turn the markets at any given time. This is going to offer you protection from the conventional methods of trading and put you on the right side of the food chain! Be sure to sign up for one of our free events for an introduction to supply and demand trading and learn how to locate & follow the shark.
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