How Institutions Buy and Sell on Price

01/31/2013 6:00 am EST

Focus: STRATEGIES

Sam Seiden

Chief Education, Products and Services Officer, Online Trading Academy

Learn how institutional traders buy and sell based on price alone from Sam Seiden.

My guest today is Sam Seiden from Online Trading Academy.  We're talking about the way institutional traders differ from retail traders, and Sam, one of the ways is how they buy on price.  Can you talk about that?

Yeah, so at Online Trading Academy, we use price, and price alone, to determine where banks and institutions are buying and where they're selling, but I think what your average retail trader doesn't even begin to grasp is what they even need to look for on a price chart.  They're filled with-their brain is just filled with all this conventional, technical analysis and all this other stuff, when in reality-let me take you back to a little story, first of all.

I started on the floor of the Chicago Mercantile Exchange and I was down there for a while before I ever even knew a price chart existed.  This was many years ago before you could trade online, but I live in Chicago, born and raised in Chicago and the minute that I found out that there were these things called price charts that you can get at home, I don't know if you've ever been in Chicago in the winter, but it's-I was all over that.  I wanted to get charts at home and start trading, so I'll never forget the first time I printed out a price chart because I wanted to figure out what this is and everything.  It was a bar chart back then, not a candlestick chart, but I figured out this is time and this is price and these bars represent trades or I guess, more specifically, filled orders, so as soon as I realized what that price chart represented, whether it's a bar chart, candlestick chart, line chart, point and figure, they all represent filled orders, right, that's what we see today.

As soon as I realized that that's what the chart represented, I crumbled up the piece of paper and threw it on the floor with all the other paper at the Merc because to me, not only was that not showing me what I needed to see, but it was showing me actually the opposite of what I needed to see, and my point is when you think about the only thing that's responsible for prices moving in a market and prices turning in a market, is it filled orders or is it unfilled orders?  It's unfilled orders, but the price chart doesn't show you that.  The price charts shows filled orders.  Who cares about filled orders?  Filled orders don't do anything for me.  I want to see where Goldman Sachs has a bunch of buy orders that are not filled, demand, a bunch of sale orders that are not filled.  The price chart doesn't show us that, so that's what we need to-we need to see that on a price chart.  Now, again, we can and it's not that difficult to picture, to figure it out, you just have to know what you're looking for.

But with high frequency trading these days, some would argue that there's orders coming in and out so quickly that it's hard to tell what's real and what's not, so how do you still know?

Well, there is a lot of high frequency trading, but most of that high frequency trading today is market maker activity, just automatic spread betting in the UK is a great example.  That's basically all-there's lots of companies doing it, but it's basically all the same algorithm behind the scenes.  Same thing with the high frequency trading.  Most high frequency trading is not okay, I think the markets going from here to here, so I'm going to buy it here and sell it here.  It's big groups-the Goldman Sachs of the world making markets.

But it's more than just seeing 100,000 shares of something being offered by GS and knowing that that's where they are.  I mean, what else is there to this?

Yeah, see again, like looking at the Level II, if you trade stocks or the matrix, if you trade futures or forex, we don't buy into that.  I would argue that that stuff's not even real and my point is how many times a day do you see the bid ten times the size of the offer, but prices fall, or the offer ten times as high as the bid and prices rally?  Happens all day long, so if those numbers are real, how could that happen?  It couldn't, but why are those-why do you see that all the time? 

Again, when we identify-let me give you an example.  When we identify a price level where institutions are selling, often when price comes back there, you'll see the bid be five, ten times the size of the offer and you think, wow, price has to go up there if they're flashing that quote.  Wrong.  Remember, the only way that institutions are going to fill those sell orders is people need to be convinced that that market is worth buying right there, so what's one thing to do?  Throw a big bid out there.  Doesn't mean it's going to get hit or it's going to get filled, so you can watch the bids and offers on the screens, but you have to know how to play the game and how the game is played, otherwise, you're going to get played.

All right, so can you give us a real quick example of how you find the wholesale price or how you see where those institutions are really buying and selling?

Yeah, so we look for a specific picture or a pattern on a chart.  It's not three, five different pictures, it's one, and then along with that we have this list of things we call odds enhancers.  First of all, we look at-we identify how prices leave an area.  The stronger the price leaves an area; the more out of balance supply and demand is at the area, meaning big supply and demand imbalance, institution.  How much time price spent at that level?  The trading books say if you want to look for areas on the chart where there is the key support resistance levels, look for areas where there are many candles on the screen and lots of trading activity.  We look at the opposite.  In other words, at price levels in any market where supply and demand is most out of balance, you're not going to get many trades and transactions, you're going to get very few because of the big imbalance, so what does that picture look like on a price chart?  It's not many candles like the books say, it's very few, so price level where there was very little time there, strong move away from that level.  We objectively identified a profit zone or profit margin and there's a few more things, these odds enhancers, and that helps us determine, really pinpoint where those banks and institutions are buying and selling and that's where we want to buy and sell, and it's a very-I can't emphasize enough how it's just a very-razor sharp focus on that mindset.  Really just living and breathing like an institution, not that retail mindset.

Obviously, we've just scratched the surface.  Probably more information at TradingAcademy.com?

Lots more.  I talked as fast as I could to get it all out.

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