How to Track Institutional Trading During Day Sessions

When it is all said and done markets go higher on more buying than selling and lower on more selling than buying. The entities that do the bulk of the trading volume are the larger institutions. Their buying and selling is the engine that drives the markets directionally. And it is their profit taking and/or reversals that turn the markets at those moments when things seem the brightest or darkest that they can be.

You have heard the old trading adage that “size is earned”. No one starts off trading a large amount of contracts. The ability to trade more contracts comes from demonstrated expertise, proof that you can successfully handle larger amounts of money and deliver the projected returns for your clientele – or yourself. It stands to reason that if you can track the larger trader’s orders, and then trade with them, that your chances for success will increase.

Tracking the Big Money

Everyone who trades for a living wants to trade with those “in the know”. If you can trade with the “big money” or the knowledgeable traders, your trading can improve and quickly too. Going with the capital flow as it enters and exits the market is a more efficient way to trade than the alternatives that most of us face today. It is another way of not fighting the tape or trend, so to speak. To actually do this one has to isolate and track the trades of the larger traders.

There is a certain size order/volume that drives the markets. Once you isolate the size of these orders, you can track their entry and exits from the market. The markets usually begin to move with their entry, then pause or reverse when they exit their positions. While the size of the order that drives the market varies from market to market, the impact of a certain size order on a particular market doesn’t.

When you boil it all down and strip away the noise associated with trading, there is a certain size order that drives and controls the market. Find the size of this order and you have another piece of the trading puzzle.

In the Market

The following charts are from Friday, February 22, 2013 and for the ZB/30 Yr. Bond. The first chart is filtered for the institutional order size that drives the trading in the ZB. The low was set at 143-20, one bar before the institutions began to buy. Even when the market corrected from 144-00 back to 143-25 the institutions stuck with the buy side of the market and added to their positions.

They didn’t begin to take profits until the market reached 144-06, the high of the day. Trading with the institutional order volume of a specific size would have kept you on the right side of the market and led to better than expected profits than the usual arbitrary exit that most retail accounts use.

Trading with the larger traders can keep you in trades until the move has been completed, and thereby increase your bottom line significantly.

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The next chart is filtered to track the retail accounts trading. It shows an entirely different trading picture than the chart above which tracked the institutional traders. The retail accounts began to cover their shorts when the institutional traders did. And they eventually sold at the market’s high, which was a bar before the institutions turned sellers.

The picture changed for the retail accounts when the market hit 144-00 and then traded back to 143-25. From 09:05 until 11:08 when the market traded from 143-25 to 144-03, the net cumulative volume was both up and down for the retail accounts as they entered and exited the market. It would have been hard to stay long based on what the retail accounts were doing during that time period.

Compare their trading with the institutions’ consistent commitment to the long side of the market during that same time period. The institutions stayed long and added to their positions but the retail accounts didn’t. The retail accounts’ indecision could have limited the trading profits to several of ticks if they had exited at 143-25 as opposed to 144-05.

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The larger traders know what they are doing and have definite ideas about where to enter and exit their trades. The retail accounts don’t have the knowledge or experience to match their institutional cohorts. It takes time to build this expertise. Time and capital are usually limited for the retail accounts.

In Summary

You can short cycle your learning time and improve your chances for success as a retail trader by following the institutional traders as they enter and exit the market. The lack of time and capital are formidable obstacles that face all retail traders when they begin trading. The odds are against the retail account no matter how successful they have been in their other endeavors.

Why not increase your chance for success. This can be done by trading with the segment of the market that is already successful, the large institutional traders. The right software will allow you to filter the time and sales information for the institutional volume and improve your trading today.

Part 6 of Charles’s Series

For more from Charles including daily market commentary updates, please visit Cochran Nannis Futures Trading. You can also contact Charles with direct questions regarding his approach.