Want to Trade Like the Market Majors? Study the Catcher’s Signals
By OTA Instructor Scot Stokes
Want to Trade Like the Market Majors? Study the Catcher’s Signals. Institutional Supply and Demand Provide Peeks of their Playbook
For traders and investors, it’s crucial to be able to read the game plan of the major players in the markets - the big banks and institutions. Oftentimes, they’re the ones calling the shots, since it’s institutional supply and demand that helps determines price change and moves the markets. And you can bet they’re not going to just give away their strategies. After all, if you know exactly where their orders are, you could place yours right before theirs. However, they do leave clues as to whether they are buying, selling, or just sitting this one out. Where? In the price charts, and as a trader, it’s your job to interpret those signals.
Here's a story I like to tell in class. Let’s say you have six tickets for a major league game you plan on attending with your friends. Now, a day or two before the big game, two of your friends have something come up and bail on you. No problem, you think, you can just sell the tickets at the park the day of the game.
So, you get to the gate the day of the game and the first thing you see is a professional ticket seller, a scalper, with a fistful of tickets. He’s asking $240 for two similar seats in the grandstand. And hey, there’s another one over there selling two tickets with a “low ask” of only $200. Obviously, he’s selling plenty of tickets while the guy asking $240 for them is twiddling his thumbs and biding his time.
Here are your choices: you can either try to sell your tickets at a high price, say $250, but then you should expect to be standing outside the gate for a while, maybe even missing part of the first inning. You’re also risking not being able to sell your tickets at all. Who wants to pay you $250 when they can get a ticket from a big seller asking for less? Your second choice is to sell your two tickets fast by offering them for $195 and quickly finding a buyer.
When you make the sale, the market for tickets in front of the gate momentarily drops to $195, then jumps right back up to $200 after you leave. The seller of the $200 tickets doesn’t need to compete with you since he knows you’ll be out of the market fast and price will be right back in his ballpark of $200.
If you think about it, at $200 there are quite a few transactions taking place in front of the gate. The market is balanced for a while and will stay that way until all the $200 tickets are sold. That’s what the guy selling tickets for $240 is waiting for. As the seller of the $200 tickets runs out of supply due to demand, the imbalance causes prices to quickly rise to the next level of professional/institutional supply at $240, where it stabilizes and balances again.
This scenario plays out every day in the financial markets. At the ball game, you can see exactly what the professional/institutional ticket sellers are doing and act accordingly. While the institutions are better able to hide their buying and selling levels in the stock, futures, and Forex markets, they still leave their tracks in the charts for those who have been trained to read the story. For traders, being able to spot these areas of institutional supply and demand is key.
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For educational purposes only. Trading is risky and you can lose money.