Price Action Trading, and why can’t institutional traders use breakout trades.
At the end of this article you will understand the advantage that you have in the market with price action trading. This is aimed at individual traders, not ones who work at trading firms or hedge funds. This is one of the many edges that you have against traders with big size in the market.
Your position size doesn’t effect the market:
When you are looking at taking a position in a stock, futures, or the Forex market, you have to consider size. Are you buying 1000 shares in a stock with a float of 2m, or are you taking 10 contracts in crude oil futures. With each of these, your actual effect on the market is minimal. Whatever sizing you choose, will most likely be below any amount needed to effect the market.
This is totally different than large institutional traders. They cannot take small position size, or size into a trade that is running. If a stock is running from 2 dollars to 3 dollars quickly, there are many entry points in between for small size traders. If you are looking to amass a position of 100k shares between the 2 and 3 dollar market on a stock that only has a float of 2m, the slippage institutional traders will get can be extreme.
The build up with Price Action Trading:
Say there is a key pivot in the market at 5 dollars. This can be a bull flag, flat top, or break of Highs/lows. Long bias traders want this level broken, but sellers want to keep this level from breaking. We have this clash in the market between buyers and sellers, at a key level. As we see this level break, there will be a rush of buying and selling. The sellers want to exit their positions as their trade is going against them, and the buyers want to add size for the break. With a small account, you are able to get in at a price close to the pivot with your full position size. An institutional buyer cannot.
The institutional buyer has to accumulate his order below that level for the possible break. If he waits for the break, his entry will be spread across the run up in the market. He needs to build his order up before the break, or wait for the market to stagnate again.
This is why many traders use Market Profile. The Market Profile will indicate where areas of intense buying are in the market. These areas where traders consider the price to be fair, and are buying/selling instead of holding.
Check out Video on Market Profile:
Bruce Banks