Know Who You're Up Against When Trading

By Chris on 2013-05-21 in E-mini Trading (0) Comments

Know Who You’re Up Against When Trading

retail vs institutions trading smallThroughout any trading day you’ll find yourself up against a variety of traders at many levels. Some may be just like you and trade in a similar way, while others in ways you’ve never even heard of. To go against popular belief here for a second let’s try to understand this.

Most successful traders don’t know what they do “well” and what they do “poorly” and in fact most traders struggle. When someone assumes that you need to know your strengths and weaknesses they are falling into something of a trap. I would assume more value in knowing the strengths and weaknesses of other traders so as to capitalize on what causes them to struggle.

So, What Strengths and Weaknesses In Trading?

You’re probably saying “isn’t that the same as knowing my own strengths and weaknesses?” You may not expect this answer, but you’re right on all accounts. The only difference is how you apply this knowledge that cripples a trader. Do you consider it a weakness or do you capitalize on it as the other similar traders approach a trade?

Now we know that the e-mini futures markets are made up of very distinct categories of traders. These are the institutions and the retail traders.

My Thoughts on Institutions Trading Backbone

Though they can move the markets in a second it may not be their best option. Though it seems like it I believe it’s done simply out of massaging a position in not to rule the markets.

Though I believe their targets are far lengthier than what I shoot for, I know that they aren’t looking to stick around for only a few seconds with many contracts. They have a reason for entering and they require liquidity to enter and exit.

The “Flash Crash”

Case in point:

The flash crash was to my knowledge a fat fingered trade that caused a bit of panic. It was a plethora of activity that happened to occur all at once.  A little bit of panic led to a lot of sitting on hands. There was no one willing to step in as the market tanked. I’d like to assume that most of the larger traders held back, but you know this wasn’t the case as you can’t help but join. It felt as if the market was done with. What did we see after this?

Well we saw the market rebound with similar fury as the recognition of overreaction set in. Some were stuck and those who were heavy handed were forced to figure out an exit before it was too late.

Now I’ve never traded more than 10 contracts on a trade, but I know that trading a market like the Russell it’s tough to find an out and entry when the market is screaming. The higher you go in contracts the less accurate a fill I feel I get. Of course 10 in the S&P’s may be no issue, but for the markets I like to trade that’s pushing some sort of a limit for my style.

 I think that an institutional trader has goals that would be nice to know we simply don’t. So I don’t know if I’m looking to follow this trader. They may have an agenda and they with their sheer size may hold the market back to implement what they want. I can’t control this, but I can try and see how they are going to achieve this.

My Thoughts on The Retail Trader Backbone

In my eyes I see us as the traders whom throw the market around for each other. We fight amongst ourselves while the largest traders do what they need to do. We tug and we pull and strive to remain within reason with respect to our accounts. It would be hard though for me to get together with even 100 traders and put together enough to push back against an institutional trader. So why try? And more importantly who do we choose to battle?

This is by no means accurate and can be totally wrong, but this is how I view the market. Note that I’m not referring to amount of traders rather “purchasing power”.

retail vs institutions trading

Let’s notice where most of the heartbreak is occurring in the above graphic and more importantly where the wealth seems to be collecting. We’ll note the retail traders whom make up the smaller portion and the institutions whom make up the larger portion. Of course we know the larger portion is raking in the money while the retail is slowly but surely chomping away.

Out Smarting Your Retail Trading Peers

Now who do I believe I can take on? I’ll take my chances against the much smaller retail trader and continue to let the large institution do what they want. Even if I did have an agenda against the large institution it’s obvious in my mind that no matter what I tried to do I would not succeed. Even I was able to get every retail trader together and on the same page I don’t think we’d have any push, pull or tug.

 Hopefully we’re on the same page when they decide to make some moves, but I know one thing for sure. I won’t be trying to outsmart them. I’ll be looking to try and outsmart the retail trader who always seems to think the market is tanking. The retail trader who always makes the same mistakes and overreacts to gyrations through the day then decides to jump on late when the institutions make their position adjustments. I believe institutions make mistakes, but I believe they have the ability to correct mistakes where as the retail trader takes a trade then leaves it up to chance. I want to jump on those who continually take uninformed or common “chances”.

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FULL RISK DISCLOSURE: Futures trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.



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