At Online Trading Academy, we teach traders our core strategy that allows them to identify where the institutional traders are entering and exiting the markets. If you know that these traders routinely make millions of dollars at day trading, it makes sense that if you follow their actions and copy them you could be profitable as well. The key is knowing where they are beginning their orders and where they are completing them.
Institutions trade in extremely large size. However, if they tried to buy or sell all the shares they wanted at the same time, they would cause the demand or supply equation to become too imbalanced and prices would move away from their preferred entry or exit price very fast. They would never be able to purchase or sell shares where they wanted to.
So, to enter or exit properly, these institutions must work the order. This involves placing many smaller orders that, filled over time and in a range, will eventually complete their intended goal of buying or selling a large amount in a range that they deemed a good price. I experienced this first hand while working as a trader for a hedge fund.
As individual traders, we look to the charts to see where these institutions are placing their trades. The pattern can be obvious if you know what to look for. The other thing we need to be sure of is that when we find these chart patterns or set-ups, they are as close to the origin of the buying or selling pressure of the institutions as possible.
Think of an institutional trader who needs to buy three million shares of Facebook (FB). The average volume of FB is 25 million shares per day. This breaks down to a bit over three million shares an hour (there are 6.5 hours of trading in the US markets per day).
If they put in the full order all at once, everyone would know there was major demand and prices would jump upwards too quickly. Instead, the trader will buy as many shares as they can without pushing the market out of their preferred range. As some point, the number of sellers will diminish, perhaps even going to zero. Eager buyers (including the institutional trader) will push their bids higher to attract more sellers to give up their shares. This is the set-up we look for.
Most of the time prices will rise out of the range where the institutional trader will be willing to buy. Whatever orders they were not able to complete will be saved until prices return into the preferred buying zone.
This is where we, as individual traders, can buy as well. Once you have identified the origin of the institutional buying zone, you can place a buy order in that zone as well. When prices return to the level and you buy, the unfilled orders of the institution should absorb the remaining sell orders and propel the price higher, as it did before. Thus, you profit by riding the purchasing power of the institutions.
The traditional technical analysis techniques of Support and Resistance will not work this way. Think about it. If prices move due to the institutional orders, then every time prices return to the origin of those orders, there would be less orders to turn price around! Imagine the ocean. When waves hit the beach, it erodes the beach by removing sand.
So, we get the best trading opportunities buying and selling when the institutions are placing their orders. Unfortunately, their initial move is extremely difficult to identify. The next best time is to enter on the first retracement to the origin of the zone. This area will have the most leftover orders. Additional retests of the area are weaker and are lower probability opportunities in the market.
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