The Orderflows Absorption Course

Module 2 – Understanding The Players

 Disclaimer
This presentation is for educational and informational purposes only and should not be considered a
solicitation to buy or sell a futures contract or make any other type of investment decision. 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.

CFTC Rules 4.41 - Hypothetical or Simulated performance results have certain limitations, unlike an
actual performance record, simulated results do not represent actual trading. Also, since the trades have
not been executed, the results may have under-or-over compensated for the impact, if any, of certain
market factors, such as lack of liquidity. Simulated trading programs in general are also subject to the
fact that they are designed with the benefit of hindsight. No representation is being made that any
account will or is likely to achieve profit or losses similar to those shown.
Big traders, institutional traders, or however you
wish to describe them are the bogie man in the
trading world who smaller traders like to blame
when everything goes wrong.

Nowadays there are so many different types of

traders that can move large size in the market that
lumping them together devalues their worth.
Trading is anonymous. Its impossible to know the actual buyers and
sellers in the market. But through logical thinking a trader can make a
fairly accurate assessment of the players.
At any given point in time, there are many different buyers and sellers in the
market, trading different time frames all having different opinions of the
market now and some time in the future.

Not everyone is trading a 1-minute chart, 30-minute chart, 4-hour chart, daily
chart.
Which one is the short term trader?
The difference between institutional traders and retail traders?

The retail traders take trades based on profit potential, what is the winning
percentage or profits.

The institutional takes trades based on risk evaluation, what can I lose.
Who do you think is buying? Selling?
While I would separate retail traders and institutional traders, I would then
further define institutional traders.

Within institutional traders, I would break it down between long term traders
and short term traders.
Different market participants:
Short term traders
Long term traders

Short term traders trade because they need to. They tend to trade more
aggressively. They want to get into a position now. More prone to getting
trapped in the market.
Long term traders can wait. They tend to trade passively. They are willing to
wait for the market to come to them. Don’t get trapped very easily.

Many traders don’t differentiate between the different traders.

It is almost as if they think everyone looks at the same chart. Long term
traders have a vastly different market outlook than short term traders.
Sucking them in
The most important part of market understanding is recognizing when
different time frame participants are active. Markets are dominated by short
term traders who are more focused on price. When longer term traders
realize that the market has moved too far away from value. They come to the
market and compete alongside short term traders for opportunities. What is
important for you to understand is that the market’s balance has shifted. It is
no longer dominated by just short term traders, now longer term traders are
competing with short term traders and you start to see the market trend.

This is can be seen in the order flow, if you know what to look for. However it is
difficult to isolate a trade as being done by a short term trader vs. a long term
trader. But when you take into account market structure it become clearer to
the trader.
Who is the longer term trader? It is the position trader – a commercial, a
portfolio manager, real money accounts. A longer term trader doesn’t have to
trade a market on a given day. But when he does he can be more cautious and
passive. He can let the market come to him. If he doesn’t get filled, he is fine to
wait it out. He is trying to capture market generated opportunities undetected.
When the longer term trader become a little more anxious he starts
becoming aggressive and his actions start to be seen by short term traders
who then also start to trade alongside the longer term trader.
Are long term traders active?
Long term traders active.
Long term traders view buying and selling differently.

When there is long term institutional buying at the end of a downtrend, that is
often enough to start a trend up. Traders are happy to start buying and see a
trend upward begin because they like to buy low and sell high.

However, when it comes to selling, traders have to be more cautious. Long

term traders generally are always holding inventory and want to sell at
opportunistic prices, but if they sell inventory too aggressively the market can
drop very quickly and their profit opportunity will evaporate as prices will
revert back to value. At highs, long terms traders are more cautious, but get
aggressive once the prices start to go lower to a point. Usually when they sell
it is to take profit, but not always.

Long term traders buying and selling will change the overall supply/demand
in the marketplace.
Trading at a high
Trading at a low
Signs a market can go lower
Long term institutional selling takes longer than buying.

The long term institutional traders are more cautious when it comes to selling
than buying.

Think about it. If they sell too quickly the supply/demand paradigm can shift
and other traders pick up on it and join the selling and the market can start
trading lower and they will eventually sell at lower prices.
Selling at a high
Selling at a high delta
Long term traders trade highs and low differently. They have to.

Long term traders are more inclined to place offers at high prices rather than
hit bids so as not to show selling pressure to the market. This is passive selling
which can be detected in the order flow. They are more inclined to work offers
to sell into a rising market above the current price to take profits on inventory.
They don’t wait for a top to be put in before selling, rather they are sellers
when profit targets are hit.

Conversely, their buying is different. They tend to buy when they feel the
market is below value.
The long term traders are often the traders responsible for the way the day’s
range develops. When they are active the market most often will have a wide
range. If they are absent, the market will have often have a narrow range.

That is why it is important to learn to recognize their activity in the market and
the footprint charts.

The easiest way to detect the long term trader is through an increase in
volume.
Defining a high
The long term traders are the ones who cause trends and also keep them
moving in a direction. If the long term traders are also participating in the
trend the gains strength. If the long term traders stop participating in a trend,
the short term traders have to pick up the slack.

When long term traders are active in the market, their buying is the catalyst
that push prices higher or their selling push prices lower.
Trending market with long term traders
A nice trending market.
The long term trader is not just looking for a fair price in the market, rather
they are looking for an advantageous price or opportunity to trade at. Their
mentality is completely different than a retail trader.

Generally speaking, that is going to occur when the market is either trading
above or below market value. If the market is currently trading where it is
valued, they don’t have opportunity.
The long term trader generally does not look at volume in deciding to trade.

In fact, they often participate when there is light volume.

They buy as much as they can at low or sell as much as they can at highs that
they perceive as unreasonable.
Less volume
For the long term institutional trader, what matters more is managing the
position than finding the perfect entry and perfect exit.

Short term traders have an advantage of being quick and nimble. They can
quickly enter and exit positions without worrying about liquidity. They can
wait for a trend to start to get in.
Being a long term institutional trader has its own problems that retail traders
don’t face. A retail trader has no issue with liquidity. An institutional trader’s
order size is often big enough to create liquidity issues when getting into and
out of a position.

For a long term institutional trader, already holding inventory, buying into a
rising market helps him. The current price is going up. He is making money.

But if he is long and looking to get out, he needs to sell into a rising market,
not a declining market. If he sells into a declining market, he may ultimately
actually lose money if he helps drives the price lower as well as competing
with other sellers. Institutions also need liquidity in the market and it is easier
to find liquidity if you are a seller in a rising market than a declining market.
Selling into a rallying market
Why is the difference between long term institutional traders and short term
traders important? Because long term institutional traders tend to trade
against short term traders/retails, not other long term traders.

Short term traders have created market excesses resulting in highs or lows
that draw in the long term traders.

Long term institutional traders shift the supply and demand paradigm which
draws in the short term traders.
When the market is experiencing heavy volume, the longer term traders are
showing their commitment and confidence in the market. Forget order book
and depth of market, what matters is what traded.

Volume is the one piece of market information that can completely change the
supply and demand dynamics.
Aggressive buying off a low
The million dollar question…Are long term traders smarter than short term
traders?

In some markets definitely yes. But other markets, like individual stocks I
would say no. Generally in markets like futures and forex long term
institutional traders have access to information the general public doesn’t. In
equites, retail traders are more active than in commodities, retail traders have
their own money at stake and can scrutinize all the corporate information
available about a stock.

But the main difference is long term traders are the ones who provide a lot of
liquidity and start trends. A trend in any market cannot be sustained unless
there is institutional activity.
This concludes module 2. In module 3, I will discuss recognizing absorption.
What are the early signs is it happening so that you can take advantage of it as
soon as possible.

See you on the next module.