Track Course Progression:
5b - Institutional Vs. Retail Traders
Now that we have waffled on enough about retail traders let’s talk about institutional traders, who they are, and what makes them tick.
In this Article
- What is an Institutional Trader?
- What is the difference between Institutional and Retail Traders?
What is an Institutional Trader?
An institutional trader is pretty much the exact opposite of a retail trader. An institutional trader is a trader that works for some kind of financial institution such as hedge funds, banks, investment banks, prop houses, pension funds, or any other type of money management firm. Said another way, these are corporate traders, not at home traders as in the case of retail traders.
These traders will typically get an economics, math, MBA, or finance degree from a college or university before getting a job as a junior trader at a financial institution. Over time, as they gain more experience, they will learn how the largest traders in the world manage huge sums of money on behalf of the bank or their clients.
We are only going to describe institutional traders that deal in Forex but most of what we have to say will have some spill over into other asset classes.
The institutional trader will typically start their career as a junior trader or analyst and work their way up over the years to become a senior fund manager with billions under management. This process will typically take many years, if not decades, to be able to get to the point where the trader is competent enough to manage huge sums of money while pulling an above average return when compared to traditional asset classes such as stocks and bonds.
Their main focus is on the fundamental situation of economies. Much of their attention will be paid to the central banks of each major nation that they monitor and the economic statistics coming out of their respective countries.
They also pay strong attention to the current market sentiment, have strong risk management skills (or they will get fired), keep a solid trading psychology, and might use a tiny sliver of technical analysis thrown into the mix to help time an entry. However, they will tend to use technicals more as a way of knowing what the “dumb” money is going to do so that they can get their hands on more liquidity.
These players make up the largest portion of the Forex trading volume making them the most influential traders over price movements in the Forex market. They have access to virtually unlimited amounts of capital in some situations. So don’t get in their way because they will happily run you over.
Because these traders have access to so much money it highlights why we as retail traders should want to know how institutional traders think and trade. Doing this will offer us opportunities to jump in on their trades and let them move the market with their huge buying and selling pressure. This gives us a free ride along the way. Sounds pretty good!
Just imagine if you knew what information the largest institutional traders in the world were watching and how they might look to trade that information. You could literally just join them when the trade happens. Again, this is what this guide is all about.
We keep speaking about all the great things you’re going to learn and we do this because it’s important to keep up your motivation while you learn some of the information that may not be super sexy or exciting.
There are many institutional traders that are “execution only” traders. These are the traders that are taking orders from their clients rather than hunting for a profit. Their clients are typically the institutional traders that are the profit seeking traders.
These execution only traders are not the kind of institutional traders that we are referring to. We are talking about the ones managing the world’s money and owning the markets like bosses. We are only concerned with knowing what the real traders are thinking and how they intend to make a profit.
What is the difference between Institutional and Retail Traders?
The major difference is in how an institutional trader approaches the Forex market when compared to how a retail trader approaches the Forex market. The differences will become more apparent by drawing some comparisons.
The retail trader usually starts, and sadly ends their trading career, by utilizing some sort of technical analysis system that uses past price behaviour, patterns, or indicators that attempt to predict future price action. This is in direct contrast to institutional traders whom will almost never look at any sort of technical indicators or patterns to help give them an edge in their trading.
Institutional traders focus on the fundamentals and sentiment with strong attention paid to managing risks and keeping a proper trading psychology. Retail traders focus on technical systems, price patterns, and indicators while typically lacking sound risk management and good trading psychology. Sometimes the only reference a retail trader typically makes about trading psychology is to blame their bad psychology as the reason they can’t make an overall profit.
It’s a very typical thing for retail traders to blame the market for their losses rather than owning those losses as their own. A lot of people have a hard time considering that they are the one that is actually wrong because it’s just easier to blame the broker or the market. What they are really doing is protecting their own ego. It sucks to be wrong and take a loss but losses are and always will be a part of this game unfortunately.
Institutional traders massively focus on risk management and rarely use leverage. If they do use leverage they are very careful about not risking more percentage on that particular trade than they would if they had not used any leverage at all. Retail traders look for Forex brokers that offer 200x, 500x, or even 1000x leveraged trading accounts.
The idea the retail trader gets in their head is that if they really leverage up their trades they can turn something like $500 into $100,000 very quickly. While this is possible it is doubtful that a newer retail trader has the skills and training necessary to pull that off. They typically leverage up without considering that they might just lose their $500 much faster with more leverage.
Retail traders are typically far too undercapitalized to make enough money to support their basic needs. This is what causes them to take excessive risk using way too much leverage. This kind of behaviour inevitably leads to poor trading psychology and developing bad habits that become insanely difficult to break.
Retail traders miss the point that trading consistently in a professional manner while developing a proper track record is more important than making money. You can’t trade with money you are scared to lose and expect to make millions. That kind of pressure is too much for most people. If institutional traders too much leverage and screw up they will throw their career away and get fired. They are typically well backed with capital and receive more capital as they continue to show consistency and improve their track record.
Institutional traders pay top dollar for the fastest news feeds and audio squawk services available on the market. Examples of these are the two most well-known; Bloomberg and Reuters Ikon. They do this in order get market moving news and information faster than their competition. Retail traders typically avoid news events and pay very little attention to economic data releases because their trading patterns and technical systems fail during these times.
This is ashamed because some of the best trading opportunities happen right around these news events. But, you obviously need to know how to trade them. We will show you how to do that later in this guide.
Institutional traders focus heavily on developing and maintaining a healthy trading psychology that keeps them razor focussed on the things that matter the most to their trading in real time. In fact, many institutions pay to have in house psychologists on staff to keep their traders mentally sharp and focssed. Retail traders focus on systems that attempt to remove trading psychology and hopefully have a win rate of 100%.
Are you starting to see the differences between how a typical retail trader and institutional players approach trading in the Forex market? For the most part they do pretty much the opposite of each other. And you also have to consider who actually makes the big money from the market. From experience on both institutional and retail sides that retail traders are overall net negative in a big way compared to institutional traders.
Next up we look at why you should learn the way institutional trader’s trade. The answer might surprise you. Brandon also share with you a personal story of what not to do if you want to be successful as a Forex trader.