Following Institutional Buyers and Sellers

Our interviewee for this edition of the TraderTalk podcast makes money in the markets by following institutional buyers and sellers. We discuss how he does that by following price action on multiple time-frame charts. Reynaldo Soriano also explains why he feels most traders misinterpret traditional support and resistance areas. He also explains how he finds areas of "price strength" on his charts and uses that information to place trades. Finally, we talk about the current markets and where he thinks his best trades will be in 2013.

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Tim Bourquin: Hello everybody and welcome back. Thanks for joining me for another TraderTalk podcast. My guest today is Reynaldo Soriano. We're going to talk to him about his trading methodology and his overall philosophies, approach to the markets. The idea, of course, is to give you something to think about in your own trading that you can use when you approach the markets. So first of all, Reynaldo, thanks for joining me on Skype today.

Reynaldo Soriano: Thank you for having me, Tim.

Tim Bourquin: So talk about your kind of trading. Are you day trader, a swing trader, and then what markets do you trade?

Reynaldo Soriano: I'm a 90% swing trader, 10% momentum trader, and I do trade the currency markets, which is about 95% of my trading portfolio and 10% are the futures index that I do hedge from my currencies.

Tim Bourquin: Okay and great. Is it the spot forex market or the futures market?

Reynaldo Soriano: Spot forex market, yes.

Tim Bourquin: What types of things do you like to put on a chart to watch? What kind of technical analysis do you do?

Reynaldo Soriano: To be honest, Tim, I don't have any indicators used. It's just plain price action through supply and demand.

Tim Bourquin: Great. I'm always interested in hearing about traders who do that because I think traders go through an evolution where they start with indicators, they start with a lot of things on their chart and then they quickly move on to just watching price. So we'll talk about the kinds of things that you look for at a chart, then in terms of price action, to find a good trade.

Reynaldo Soriano: All right, great. Actually, when I started to trade regularly I attended one of the many workshops and I had like maybe three or four different indicators. It was pretty good. The success rate was probably about 70%, between, yeah actually 60% to 70% and I cut my losses short.

Then one day actually when I got to the United States, I met a couple of professional traders, showed my system, and basically they said, well, you have too much stuff on your screen you better get rid of them. So I said what do you mean and they said well you need to fully understand about the basic foundation of technical analysis about price action and supply and demand. Then through there I tried to fully understand more on what they were telling me.

Price action is the key pretty much to technical analysis and why do I say that? Because price is being dictated by news and that news will be dictated by a trader's emotion either positively or negatively, which then will affect the demand or supply. So it means that if a person is optimistic based on greed or whatever report it might be then there's going to be more buyers. So if there's more buyers, the price will go up. On the other hand, if a person is in an emotion of fear, they're pessimistic then there's going to be more sellers than buyers, then the price will drop.

Now what I tend to look for is mainly to be within the institution, to be with the big boys. So I need to find out where the actual demand areas are going to be where buyers will be supporting the price, hence the terminology support. Now a lot of traders basically they misinterpret the word support and resistance lines. So support is being just mainly defined by buyers supporting a certain price. So if an institution, because it can't be you and I as a retail trader, to support a certain price. It has to be a big person. It could be a bank, an institution, a market maker, a hedge fund. It could be Goldman Sachs, it can be anybody, but it has to be a big person. So we need to identify, or as a trader, I need to find out where are the strong demand areas and where price are being supported at. So if the low cannot be broken from a previous basically price then the odds and probability then that the price will go up especially in an uptrend is highly probable and your risk is so small.

NEXT PAGE: Why Top Traders Are Like Elite Athletes

So my methodology is very, very simple. It is a low-risk, high-probability trade that if it's in an uptrend and it's in the level of demand, you just have to buy because the risk is so small and the probability is very, very high. Trading is about probabilities and people tend to forget that. Yes, speculation, we need to speculate, and the reason for that is because the future is uncertain.

My philosophy as a trader and why the reason I love trading so much is because as an elite athlete, I used to be a world-class tae kwon do practitioner. I used to represent Australia in tae  kwon do and used to compete, pretty much worldwide, and then when I moved here, I was fortunate enough that when I started training at Stanford University, the head coach basically asked me. He said would you mind if you start helping out the athletes here and you could be one of the coaches and I said sure, why not. I wasn't getting any younger. 2003 was my last comp and that's actually how I met my now wife overseas and next thing you know I was packing my bags.

Then my friend basically asked me. He said, hey, we don't have any athlete in your division, do you want to try for the 2004. I was in North Carolina during the time with my now wife. She was studying law at Duke, and then so basically, I told my friend, I said give me a couple of days to think about it. So I was 33, and so I basically gave him a call back and basically said listen, Mike, I can't. I'm not going to do it anymore because in order for me to get there, I have to go home and I have to train six days a week, three times a day, and I have to really think about my life whether I'll take the chance of being here in the United States to be with her and move on with my life. I chose that and I haven't regretted that and I'm going to have basically another child. So we've got a beautiful two-and-a-half-year-old daughter and now coming on the way pretty much any time right now.

Tim Bourquin: All right. Let me ask you a question about that. Going back to you said you were doing 60% to 70% profitable trades with the indicators so why give that up? If it was going that well, why were you convinced to give up those indicators?

Reynaldo Soriano: The reason is because every indicator is a lagging indicator whether we like it or not and all indicators are being calculated by a certain price, either the high, the low, the close or the open and in most cases it's the closing price. So the future is uncertain and hence this is why people get fearful with it. A person or a trader would like always to have certainty and hence they want those indicators just to create a form of an extra tool to give the high probability of where the price is going to be.

Now the human mind has basically two parts of the brain, the left side and the right side. The right side is more of the free thinking, the artistic side. The left side is more the logical side, the analytical side. Now in trading unfortunately you need to have both and the reason why I'm saying and part of my story on why trading and being an athlete work hand in hand because in my own personal opinion trading is like a sport. It is always going to be uncertain and I'll give you a perfect example. When I used to compete, or really if I compete, you're fighting against another person. The person can kick, the person can punch at any time, it's uncertain. Hence prior to competing, you get the butterflies, you get a little bit nervous, sometimes you have the doubt like what if I get injured, what if he's stronger or he's faster than me. Because with that single doubt, it will affect every physiology, a part of that fear. But if you let that go and you become one in mind, body and spirit if you start to be in the zone and you totally believe and trust in your own ability, this is where you can perform.

The secret to success is about performance. It's got nothing to do about the most perfect system. You can have the most perfect system but if you don't have the mindset and you are not in a space of total belief and trust and confidence based on your ability, you will fail 10% so...

Tim Bourquin: You probably learned a lot of lessons like that, the ways that tae kwon do is very much like trading, I guess. You could probably draw a lot of lines between those two things.

Reynaldo Soriano: Correct. So the way I see it and the way I see it is that every time you trade, you're in a competitive mode against Olympic trader athletes out there and who are they, who are these Olympic athletes? These are your institutions, Goldman Sachs with a lot of resources, JP Morgan, market makers, hedge fund managers, professional online retail traders who fully understand the market place.

Now if a person, who is in white belt ability, who doesn't know the basic foundation, don't have the skill, the knowledge and the experience, what are the odds of that person winning against someone who is a black belt who is a professional athlete or trader out there? The odds are very slim.

NEXT PAGE: Multiple Time Frame Analysis is the Key

Tim Bourquin: Okay. So just to clarify so you're looking for areas where you see the smart money as some people say or the institutions are holding price and tell me exactly how you see that on a chart. What happens? What's the behavior of price where institutions are buying and selling?

Reynaldo Soriano: Got you. One of the key elements to successful consistent profitability is multiple timeframe analysis. Now part of the multiple timeframe analysis, it has also to be in sync with your trader profile or what a trader you are. Not everybody will be day traders and not everybody will be swing traders. It has got to do with their personality. What do I mean by that? In trading psychology, the person they call it conscientiousness meaning they have to be in a space of responsibility. So if a person is a high, really responsible and they persevere then they're good in terms of trend following. They can follow systems properly. They are the ones called neuroticism whether if the person is highly neurotic or lowly neurotic and what do I mean by that? If a person is too emotional that they couldn't control their emotions. So if they're in a losing trade, they get angry, they get irritated, and there's a lot of regret, a lot of fear. That person cannot be a swing trader because to be a swing trader, your risk has to be bigger if you want to leave your trade overnight. If the person is highly emotional, they will just not be able to sleep at night. So imagine if that person is not highly responsible or highly conscientious and it's in a highly conscientious, then that person will be in trouble. Hence, if the person cannot be able to control their emotion and they're lowly conscientious then maybe that person has to do a couple of ways first to learn more about trading, to gain more of the confidence, to know about themselves first before really putting money on the line.

The other part is being risk averse or being a risk taker. Swing traders need to take risks, bigger stops. All right and this is also now we're going to go back in terms of the indicators. Let's take a moving average, what is a moving average and a moving average is an average between a price. So in basic economics where there is a supply and demand, it's in equilibrium. So it doesn't matter what type of number you put in there, 8-day moving average, 10, 20, 50, 200, or even 100. That is the average price.

So if now the rule based system trader will begin to say to himself, "well, if the price is above a 9-day moving average, I'm going to buy", that person is too late because the price is not on an equilibrium. Where now from the demand area an equilibrium is already 50 hence a 50/50 chance of the way they're going to make money. So now the risk is also huge from the low point of the lowest price of the trend all the way through the actual price or the market price of where they're buying is way too big. The amount of money that they're going to make is so small and the probability has now been reduced from about 90% down to 50% to 40%. So this is one of the problems about indicators.

Tim Bourquin: Okay. Yeah, the question actually was though about how you see on a chart where institutions are buying and selling.

Reynaldo Soriano: Correct, and I'm going to lead into that actually.

Tim Bourquin: I see. I'm sorry. I've gotten ahead of myself here.

Reynaldo Soriano: So on a bigger timeframe, let's take the monthly chart for example, if the monthly is saying the bulls are in control in an uptrend and then the weekly chart is saying still on the bullish area but the daily chart is now showing it's in a level of supply, it all comes down to the type of the trader you want to be, the intention of the trade. So you will be able to say based on price, based on the trend who's in control whether supply or bulls are in control, if bears are in control, let's take the bear is in control for that matter on the daily chart. I'm very visual and I'm just basically creating images in my head. But if it's in a level of supply on a daily chart but it's very bullish on the weekly and the monthly, the market cannot just go in a straight line. It has to retrace and has to correct itself.

So if it's on the daily chart that's in a level of supply and you create a trading plan stating that (a) it's going to retrace, it's in a level of supply however the bigger picture of the trend is still an uptrend and the bigger picture of the trade is still very bullish and now I am going against this trade. So but it will take probably a couple of days in order for that price to correct itself to a certain point.

Here's now the key. If the price corrects itself and in most cases 80% of the time it corrects to around 50%, hence if you put in a Fibonacci number in there that are 50%, you put a moving average in there it will be on the 50%. That 50% area will also be dictated in the past a demand level where buyers are supporting that price somewhere in the past. Now if you are buying at the level of demand in an uptrend and the bigger timeframe are saying that the bulls are in control, the probability of you winning is very, very high, almost 90% to 99.999% probability that you're going to win, almost guaranteed. The risk is very small. What I...

NEXT PAGE: The Art & Science of Technical Analysis

Tim Bourquin: How do you know, how often do those trades happen?

Reynaldo Soriano: A lot, all the time. You can see the market, you can the Dow Jones, you can see the S&P, you can see the currencies. If you put an indicator in there in the marketplace, an RSI, stochastics or whatever type of oscillator, it's overbought. People have already been speculating that the market is going to drop. But the market doesn't want to. At the end of the day, the market doesn't care about the person's opinion. It doesn't care about indicators. All it cares is just price. It cares based on what the news and what the market or when I say the market, the masses of traders on where it's going to be based on the micro fundamentals of global economy right.

Tim Bourquin: Okay. But if a trade is 90% or even 99.999 as you say, if it's that much probability why isn't everybody completely wealthy and rich? Why isn't everybody trading trade that then?

Reynaldo Soriano: Because they don't understand fully about technical analysis, right. Institutions like Goldman Sachs has a 93.5% success rate of day trading, that they do trade on a high frequency type of trading and why they make money so much? It's because they have all the resources in the whole world. But if you and I as an online retail trader we don't have that resource but in order for us to make money consistently is to know where institutions are based on the price not just technical analysis point of view but also to fully understand about the micro fundamental things.

What do I mean by that? Looking at Consumer Price Index, Purchasing Price Index, GDP, G20 meetings, unemployment rate, the Philly Fed meetings, FOMC meeting, see if Bernanke is going to talk, the dollar index. So, these are the indicators that will work better in terms of the probability of your trade rather than using a moving average or any type of oscillator. This type of indicators is just an indication, just giving you a little bit of a boost in terms of your analysis. Unfortunately, a lot of traders will trade indicators but they won't trade price action. They have a certain hierarchy. Trends will supersede supply and demand anytime hence the terminology your trend is your friend. From the trend perspective after that based on hierarchy is going to be in supply and demand and then price because price will be dictating where is the price going to be supported at and where is the price going to be resisted at from a buyer and seller perspective.

Then from there if the trend is way to too strong, it doesn't matter on how strong the trend or the sellers are going to push the price but if there's going to be a lot of buyers on the bottom because they believed it's in an uptrending market, it will go up. For example, 2008 when the big bubble basically crushed in October, September of 2007 there were already signs in the level of supply 40,198, September, October 2007.

You see this is what I love. Trading has a science into it. I call it the art and science of technical analysis. Newton's law works perfectly in the trading market arena. The first law dictates the law of inertia. Now in 2007, if you look at the monthly chart, there is a doji and on that doji cross is mainly a stabilization point of view. The market has to stabilize itself.

Then Newton's law #2 dictates that force equals mass times acceleration. Force creates the momentum so mass number times acceleration is being dictated by the amount of buyers and the speed of the price.

Law #3, Newton's law #3 dictates in every reaction there's an equal and opposite reaction. So when the price will stagnate, it will either correct itself or it will continue within the momentum to the downside. There's only three ways in what the market is going to do. It's going to go to the upside, to the downside, or the sideways movement so hence in a trending marketing either to the upside, to downside. A definition of an uptrend to make it objective to everybody is a series of higher highs and higher lows. The definition of a downtrend is a series of lower lows and lower highs.

Now from 2007 where it created a higher high, there was nothing dictating in the past that it can go or that the price can go further because it's the highest it's ever been. When something is just way too inflated, this is where the bubble comes in. Too much, too much, too much, too much price, there's not enough, not enough buyers later on and all of a sudden sellers will dictate. The speed of it when there's even just a slight move this is where it will go crazy and it will burst. Hence you saw the financial markets basically when it burst that in one day the Dow can basically jump 500, 800 points pretty much in one day. So from 2008 all the way almost to 2009, it dropped so massively but the price cannot just continue to go all the way down, it has to correct itself.

NEXT PAGE: Trading & the Laws of Physics

Now if you look at the overall data of the Dow Jones industrials or the S&P 500, it has been going up for a very long time and the market cannot just go in a straight line. It has to correct itself. That was just a correction. Then from 2009, if you can see from March of 2009, that's when the trend basically got broken and there's going to be a continuation of the bull market. I've been very bullish since the stabilization of 2008 that the odds and probably the market will go to 14198 and above is highly probable.

I'm still very bullish with the markets. For the past two years, I've been very bullish while everybody is saying, no, it's going to be bearish. No, here's also a big issue. It all depends on, well, if someone is going to ask me what is your opinion of the marketplace, well then I take the question back. I said it all depends on the timeframe that you're looking for. Bigger timeframe, I'm bullish. In a smaller timeframe, I'm bearish because the market has to correct itself.

So on a stabilization point of view, where we can see the marketplace at the moment stabilizing itself. They don't know where to go, to the upside, to the downside. 14,028 has been broken, actually 14,021.95 was the last high that it needs break. So that broke that to 14,033.35 a few days ago, created a new higher high. Not long to go to 14,128 in the Dow Jones. So currently, we are in an area of supply at the moment only about 100 to 200 pips, points in the Dow Jones. Well, we're currently in a supply now.

Here's my thinking. If the price doesn't want to break 14,198, then I'm going to be shorting that guy. Why? Because there's not going to be enough buyers because in order for a price in the past to break, there needs to be a lot of good boost in the marketplace in order for gaining enough confidence, enough order for the price to break. If that 14,198 will be broken then a new higher high will occur and the market will continue to go further but if it doesn't then the market is going to collapse and once again up to where? It's going to correct to a certain point.

So in a medium point perspective once there's going to be a stabilization, law #2. From law #2, it becomes law 1, law of inertia to stagnate and then becomes law 3, either it will correct itself or it will continue based on the momentum to the upside. That's all it does. So how do we know whether the price will go 100% almost guaranteed? It's because of the trend. We need to create some form of a measurement based on our confidence in the way we're trading, we're speculating.

Jesse Livermore stated, I love his stuff, trading is about speculation but if you speculate with no actual factual evidence, you're screwed. He's so right 100%. It is like fighting. We need to be confident in our own ability that when you see the opportunity you need to take that opportunity. If you hesitate then opportunity is basically gone. There's always going to be that risk that you're going to lose but if that risk is so small and the probability of winning is very high, then that's when you make money. That's when you start winning.

Tim Bourquin: All right. I appreciate that. Reynaldo, we're out of time, but I know we've just scratched the surface here. Give us your Website so if users want to log on and find out more about you, they can do so.

Reynaldo Soriano: Yeah, right. My website is www.estetrader.com .

Tim Bourquin: Let me repeat that, www.estetrader.com.

Reynaldo Soriano: Correct, yes. Also I actually did write the book Why You Could be Destined to Fail in Trading and How You Can Avoid It. I wrote coming from an athlete perspective and there should be a certain process in order to learn how to trade and basically the process in self-performance and that is the key basically to successful trading is you need to perform and how do you perform?

One, you need to be educated, you need to have a coach, and part of that education is practice, practice, practice. You need to have a good mindset. I call it the Be, Do, Have trading principle. You need to see yourself first as being successful, being motivated, being disciplined, being in high level integrity because if you didn't see yourself in that essence then you won't be able to follow your plan, you won't be able to execute.

Tim Bourquin: Reynaldo, thanks for your time today. I appreciate it.

Reynaldo Soriano: My pleasure. Thank you very much, Tim, and you have a great day.