Market Makers, Institutions and Indicators

When I went to university over 10 years ago now, I had a friend from New York and his dad always carried in his pocket, a big roll of 100 dollar bills in a rubber band.  Money never seemed to be an issue for him as he bought his son, my friend, a nice SUV.  The dad himself drove a nice car, he always took us out to eat at nice restaurants and tipped well.  He usually swiped off a Benjamin to give to his son to tell to buy some beer for himself and his buddies.  Cool guy.

Never really wondered at that time what he did for a living.  Even if I had known, it wouldn’t have really mattered.  Only recently did I get back in touch with my friend from our days in school and out of curiosity asked him what his dad did (I even thought maybe he was in the mob).  He wasn’t exactly sure and said he worked “doing stocks,” at the NY stock exchange and then switched over to JP Morgan and now is retired.

So of course, I had to talk to him.  I asked my friend for his number and gave him a call almost immediately.  After some small talk, I dove in.

“So…… I heard you used to work in Wall St.?”

“That’s right.  I was a market maker and later went over to JP Morgan as an institutional buyer.  We used to make most of our money on the spreads but you can’t really do that anymore.  We had to adapt and most of us went the way of the dinosaur.”

Wow.  Some great insight.  I had to go further.  I want to know it all.  Indicators, ratios, algos, whatever it is, I need to know.  Unfortunately, I was quite underwhelmed with how he said they operated.

“Well, VWAP is important.  Keep an eye on that.  I didn’t use it, but a lot of guys did.  A Fiba-wha?  I don’t know what that is.  Yeah pivot points (he actually had a different name for them, I can’t recall) are levels to look at as well.  Time frame?  Doesn’t matter.  I just go off the tape and feel.  I used to trade AAPL and didn’t need a chart.  You told me a price and I looked at the tape and knew when I wanted to buy.  I’ve been retired for 15 years now, so I’m not sure how those guys work these days.”

So after about 40 minutes of talk and questions, I learned a lot but also reinforced what all of us traders know already.  It’s all about experience, time in front of the screens and the “feel.”  There was no secret.  No formula.  No grail.  He had put in 6 years as an intern then an errand boy for a few more.  No formal education.  10 years in they put him on the floor and that’s that.

Interesting, as after our talk, I decided to add pivot points and VWAP onto my charts. Removed all EMA’s, prior day H/L/C.  I never used Fibo’s.

You’d be surprised at how, to the cent, you’ll find reversals, support and resistance at these levels.  More than an EMA, more than a fibonacci.  So some ways I’ve been trying lately to incorporate these levels into my trading is to use them as an added odds enhancer.  What you’ll notice is the charts that look ugly, don’t follow any rules.  VWAP, pivot points, your secret juice EMA crossover.  Won’t do shit.  That’s because price there is completely random.

IF, however, you find a nicely trending stock where you absolutely can tell institutional interest is happening (higher volume than normal), you’ll be amazed at where pullbacks will stop right at the VWAP, reverse back to the dominant trend and find profit taking at a pivot point, rinse and repeat to the end of the day.  The hard part of course is finding these stocks as they are happening throughout the day.  Only in hindsight do you wish you could’ve had that stock to trade during the day.

Here’s a stock I’ve enjoyed trading the past week.  Notice the VWAP reversals.  I usually look for a doji or low risk signal bar near VWAP (it can be above or below by a little) and take entry .01 above it with the stop .01 below it.  Targets are usually 1/2 at 1:1.  Then if it takes off, I will wait for the next pullback and stick the stop under that.  If it’s starting to get choppy, I’ll try my best to take the rest off at at least 2.5/3:1. If I sense exhaustion, I’ll take profit.

MOMO

MOMO 2

 

Here is JD, another trade I took with trigger near the VWAP.  Best trade I had all month.

JD

Same stock a day later.  Outstanding doji signal bar at about 10:15, entry is .01 break below.  I should’ve held my second half longer as I exited when I got a 3rd bounce off of the day’s low.

JD 2

A few days later.  Notice this time it was hard to find an entry at 10:30.  I don’t recommend taking a blind entry just because it is at the VWAP.  You need a signal bar or entry technique which this kind of provided, but with increased risk (entry under that green bar means large stop).  Just after 12:00 provided a good signal bar or even at 12:45 but I don’t usually take trades at lunch time.

JD 3

Last trade I took yesterday.  MU.  Entry was at 11:50.  Perfect signal bar, just look at that narrow range doji.  Took entry .01 below that.  1/2 off at 1:1.  Then I took the second half off right after that bounce at 12:35 for about a 2.5:1.

MU

 

 

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