How to Trade Like an Institutional Trader

01/07/2013 5:00 pm EST


Sam Seiden

Chief Education, Products and Services Officer, Online Trading Academy

Sam Seiden shares why most retail traders are trying to make money the wrong way and how you can trade like an institution.

My guest today is Sam Seiden from Online Trading Academy and we're talking about why retail traders probably shouldn't trade like retail traders and to trade like institutions instead.  Sam, how is it different?  How do retail traders trade differently than institutions?

Yeah, I started on the institutional side of the business and after a few years, kind of transferred over to the retail side and when you do, that was like 17, 18 years ago and still today at the Expos and everything else, you see people are just, there's this big game going on and they don't know the rules of the game and most people don't even know that there's a game being played.  People that are trading or investing and not successful, maybe they're losing, maybe they're not losing but they're not making any money, the reason is because they're thinking and trading like a retail trader. 

We try to do, when I try to talk about it at the events and Online Trading Academy, is you need to stop, get out of that world, and start thinking and trading like an institution and coming from the trading floor, the Chicago Mercantile Exchange, you see that both groups actually do the opposite.  When institutions are aggressively buying, retail's aggressively selling and vice versa so what we do is kind of just map that out on a price chart, and there are some mistakes that retail traders make, there are some obvious ones.

Let's talk about that because I know that retail traders are trained a certain way to think about the markets and it sounds like that's probably the wrong way to think about it. 

Yeah, I mean the way you make money buying anything, you buy at wholesale prices and sell at retail prices.  That's what an institution does, that's what we do, but think about the average, let's go very broad.  Think about the average investor around the world.  What do they do?  They buy stocks, right? 

They buy high and sell low.

Yeah, I mean they're conditioned from such a young age and they don't even realize how strong the conditioning is.  Make sure it's a good company with healthy, strong management and a healthy balance sheet and good earnings and make sure the stock is in a nice healthy uptrend.  Well when all those things are true, where do you think the price of the stock is, wholesale levels or retail levels?  It's almost at or near retail prices.  Retail's buying, institution's selling.

So the retail market would say, though, that that's because we don't have the information that the institutions have.  They have some secret sauce that they know about that we don't and that's why they have that edge. 

Yeah, and that could not be further from the truth.  What the big thing that people miss is what people don't realize, and this should be like their foundation. They don't realize that how they make money buying and selling anything in life is exactly how you make money buying and selling in the markets.  In other words, once in awhile at an event, we'll be talking about this and I'll say you know I can point out the best traders in the room right now and I don't know any of you and I'll say how many people in the room actually cut out coupons or send in rebates for things and usually it's the women that raise their hands. 

I'll say you're already doing this and you're already very good at this.  You demand those deep discount prices when you buy.  That's what you need to be doing here but you don't want to because when prices are down and things are cheap, the news is bad.  There's a downtrend.  How many books have you read that said buy in a downtrend?  It doesn't exist yet that's when the smart money's buying.

Alright, so then do you make the decision okay, I'm going to buy like the institutions, I'm going to buy wholesale, how do I keep from catching that falling knife, buying something that is just cheap because it's going to be cheap and it's still going to be cheaper after I buy it.

Correct, and that comes down to the big point number two, which is core strategy at Online Trading Academy.  Identifying specifically on a price chart where institutions are buying and selling.  Institutional demand, institution supply, and it's not that difficult to see on a price chart.  You just need to know what you're looking for. 

I know a big thing for retail traders, of course, is that they want confluence of a bunch of different indicators to line up properly to give them confirmation.  Institutional traders, do they do it that way?

Not exactly.  Again, in all the trading books, they're identifying support or resistance levels and the books say don't buy at support.  Wait until prices, because you don't know if there are any buyers there.  Let prices turn, wait for confirmation, wait for a reversal and then buy.  Again, we look at that, we look at, we don't like confirmation, we don't want confirmation. 

When price is down into a level where we determine banks and institutions are buying, we want to buy it right there.  If we wait for confirmation or reversal or any lagging indicator or oscillator, all we're doing is increasing risk and decreasing reward.  Goldman Sachs doesn't say, wait, don't buy yet.  Wait for prices to rally a little bit and then buy.  They don't do that. 

Just a different mindset I guess that you've got to have.

It's a different people, that they want that confirmation.  They're willing to increase the risk and decrease the reward for that confirmation, which doesn't give anymore guarantee that prices are going to continue in that direction anyway even waiting for that.  In fact, there's less likelihood that they're going to continue.

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