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Think like an institutional trader

Davis MartinDavis Martin ·

We all cringe when our stops trip and we sell at a loss. Everyone hates a loser.

Then the market throws it in our face. They laugh at us by sending the stock soaring.

I hate it when this happens to me. 

For years, I watched this happen over and over — I nearly drove myself insane and pulled my hair out… 

I read all the right books, followed all the right people…what was I doing wrong?

Then I realized something…the market isn’t fair! 

Big money influences the market in ways you and I cannot. They can push a stock up or down with the click of a mouse.

You can get mad…

Or you can beat them at their own game.

We can use THEIR tricks to make money for ourselves.

 

Work with stop runs intraday

 

Why not use this to our advantage? 

Part of what I seek when I create my Trade of the Day is precisely these stop runs!

I look for setups where we get runs on stops…especially ones from the premarket. This lets me act like an institutional trader.

 

 

I pair up my long trades against traders who are forced to sell. Once they all get wiped out, the stock is free to move higher.

This work on the short side too. Big money will push a stock above previous highs to force shorts sellers to cover. Then they send price crashing.

This happens over and over on intraday charts. It’s a wild west that leaves only two traders …the quick and the broke.

 

Watch for false breakouts

 

Big money knows that traders love playing breakouts. They count on it.

 

 RH 5-minute chart

 

Price trades inside a clear range for a couple of hours. Right before the close of the day, you see price drop. It breaks below the range. 

That gets a bunch of stops below that level to trigger, along with breakout traders to short the market.

Then within minutes, it rakes the market back in the other direction to close well above the range by the end of the day.

No news came out that should have pushed the stock around that violently. That was entirely manipulated by big money.

Here’s how you get around that…

First, wait for the candles to close below or above a range. Two candles may be necessary if you’re working with a short enough time frame like the 5-minute chart.

Second, wait for a pullback. Rarely do the stocks take off without quickly coming back to test the breakout level. That’s a much better spot to enter the trade.

While this won’t entirely eliminate ‘fake breakout’ tricks, you’ll significantly reduce getting caught in them.

 

Spot real tops and bottoms

 

Remember back when the market bottomed during the Great Recession? How about more recently in December 2018?

Bottoms in markets tend to be marked by some key characteristics:

  1. Extremely high volume
  2. Violent intra-day reversal
  3. All major indexes doing the same thing (or the ETF that includes that stock)

This doesn’t always mark bottoms in lighter pullbacks. But, you will see this in stocks and markets when they make significant bottoms.

Tops, on the other hand, trick you. They come in quietly like a hurricane. Tepid at first, they seek destructive outcomes.

When you look for a top you’ll normally see a few things:

  1. Riskier assets like small caps or tech will sell off first
  2. Price starts to level off and trade in a tight range
  3. Upside stop runs happen on light volume

What you’re looking for are signs that big money is trying to ‘trick’ the little guy into going long.

The SPY shows a recent example.

 

SPY daily chart

 

Notice how you get daily and intraday stop runs above previous highs with very low volume.

Recent price action had the SPY moving sideways to lower. The whole sideways movement is them holding up price to dump their shares.

I won’t lie and say it’s easy to immediately see the difference between real price patterns and big money messing with you. That takes time, experience, and good analysis.

That’s why I look at a lot of different pieces to come up with my conclusions. When you rely on one perspective, you fail to see the entire map.

Don’t give up on your chart patterns. Use this information to add additional context to your trades. Ask yourself if you have multiple elements supporting the trade.

More importantly, use these stop runs to get great entry prices!

 

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