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Trade with the market - what institutional traders can teach us
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Trade with the market - what institutional traders can teach us

created Natalia BojkoJanuary 18 2021

Who is a professional trader? This question is extremely tricky. On the one hand, it can be said that he is a person who has such a status with the broker, on the other hand, that he is a man who makes a living from trading. The third side of a professional trader's coin is trading for a qualified financial institution. Of course, all these parameters may have a lot in common, but not always. Let's leave this topic aside and move on to the merits.

Today we will look at how traders working in banks and funds come out of and under what rules. We will look at this industry a bit from the perspective of the myths that have stuck to institutional trading. In the article, we are not going to present the specific profiles of institutional traders. The conclusions that I will present here come from several books and tons of read interviews (including with Brad Gilbert, which I especially recommend). Without dragging any more, I invite you to read. 

# 1. You have to be different in the market

Unconventional approaches to trading have become extremely fashionable for some time. I don't mean complicated indicators here. Rather, I would point to basing my trading on strange theories about the market. The Internet is full of all kinds of information about forexie (going further analysis) more or less reliable. Sometimes, the more weird and unconventional a method of trading, the more followers it has. However, I would like to clarify what the word means "Unconventional". Institutional traders are largely unanimous - it's about playing against the trend. Bankers account for virtually 87% of the volume of all forex transactions. Is this a sufficient argument to follow them?

# 2. Institutional traders use slots

If banks were using automated trading robots, people would not be needed in the first place. Maybe an unattractive argument, nevertheless, despite the fact that the industry (especially brokerage) has shrunk significantly, traders are still being employed. Not only in banks. Increasingly, trade is shifting to proptrading companies specialized only in this field. 

When it comes to trading robots, the only thing that can be said is that in the early 90s there was a group of fund managers who used so-called "black boxes" to tell them when to trade. Still they didn't perform for them  transaction. The bankers themselves have complex trading systems and use EBS or Reuters to settle their trades, all done manually. Unfortunately there are no automated trading robots. It is a bit different in hedge funds, where algorithmic trading is mainly used for arbitrage. There is no such person who would be able to capture and trade on various exchanges in a fraction of a hundredth of a second. Nevertheless, hedge funds do not give up on manual trading and largely robots sure "Addition to profitability". 

# 3. The more time in front of the chart, the better the performance

Do you remember that feeling when you were fascinated by Forex and you couldn't get off the charts? I think that each of us remembers them perfectly. It is also a myth that grew up with institutional trading, as if the traders there were literally spending 24/5 ahead of the charts. 

Of course, there is nothing worse than sitting in front of screens all day long and the only traders who do this are junior traders or interns. Often this trend also extends to some of the retail traders. In general, bank traders somehow assume and know when the markets will be "busy". Whence? This is due to the macroeconomic calendar. 

# 4. Orders for months and longer

Bank traders evaluate the market daily. It's not like a long-term order enters the market and traders are looking at the charts with folded hands. Occasionally, a trader, usually a long-term strategist, places orders in the market for a week or two. Nevertheless, they are consistent with the fundamental vision. If the fundamentals change in the market, the strategy changes as well. What does fundamental consistency mean?

transaction

NZD / USD chart, M5 interval. Source: xNUMX XTB.

The two events in the chart have a low effect on NZD / USD. The key events we focus on are events with medium and high impact on the market. It was important to identify a general trend in the market (a simple trend line was enough) and to find an event that had at least a moderate impact on the market. One such event was industrial production from Japan in m / m terms. Despite the fact that it is not an event directly related to NZD or USD, it does affect the general market sentiment. According to forecasts, this production should be much worse than the earlier reading. So the foundations clash with the general market sentiment. The place where we should trade is the place marked with a green rectangle on the chart. We must have a position before publication. Why? This is in preparation for trading and building scenarios. 

Summation

We can learn a lot from professional traders. These four, the most popular myths about banking, are not everything, of course, there are many more. Nevertheless, thanks to them, we can draw one simple conclusion. Professional trading is no accident. It is the result of preparing and building scenarios without accidentally entering a position. 

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About the Author
Natalia Bojko
Graduate of the Faculty of Economics and Finance, University of Białystok. He has been actively trading on the currency and stock markets since 2016. It assumes that the simplest analyzes bring the best results. Supporter of swing trading. When selecting companies for the portfolio, he is guided by the idea of ​​investing in value. Since 2019, he has held the title of financial analyst. Currently, he is the co-CEO & Founder in the Czech proptrading company SpiceProp. Co-creator of the Podlasie Stock Exchange Academy project (XNUMXrd and XNUMXth edition).