Be a Remora

It's been a rather 'slow' trading day and I had the opportunity to chat with a couple of newbie traders. Trying to explain the fundamental dynamics of the market, I'm reminded of a little story told to me by an ex-colleague.

An avid scuba diver, he loved drawing upon the ocean for analogies. He'd tell this story to many people and I must've heard it far too many times as it's forever etched in my memory.

"The market is like the big, blue ocean," he'd begin. "It's full of all sorts of wonderful, colourful marine life... much like the market itself. Institutional traders, people like us, we're at the top of the food chain. We're the sharks!"

Truth be told, he's got a point. The "sharks" are institutional traders who work for international banks and other large financial organisations such as hedge funds and even Sovereign Wealth Funds. Since most of the trading volume are transacted between speculators, there's considerable room for "sharks" to roam the "ocean" in search of unsuspecting prey (in most cases, the poor retail trader).

As an ex-institutional trader, I can appreciate the considerable advantage that "sharks" have. Not only are "sharks" typically more experienced and better trained, there are a multitude of different factors in their favour, such as the availablity of greater funds to play with, more advanced technology, better acccess to information, etc. All these combined gives "sharks" the capability and capacity to influence price levels (at least in the short-term) and "feed off" the "smaller fish".

So, in the world of "small fishes" how does one prevent from being eaten by the "sharks"? Well, one way is for the small retail trader to act like a Remora. Remoras or suckerfish can be found attached to sharks, amongst others. The shark they attach to gains nothing from the 'relationship' but also loses little. The remora on the other hand, benefits from the 'free' transportation, protection, and has the added benefit of eating food scraps dropped by the shark.

What lessons can we draw then from the remora? Well, in a world where becoming a "shark" is not an option, we need to be a "remora" instead. Therefore, unlike the 90% of retail traders that are merely food for the "sharks" and lose in the market... we need to learn to hitch a free ride from "sharks", gain protection from them in the process and still fill our bellies with pips.

In order to do so, we need to understand the "sharks'" habits and behaviours, e.g. how they go about trading intraday, where and when they like to have a meal. Although there's no hard and fast answers, you'd generally want to trade according to price action like institutional traders, pay attention to areas of support and resistance (pivot levels) and to avoid placing stop-loss orders at obvious support or resistance points. Another tip, the best times to fill your "remora" belly is to trade during periods of high liquidity (London or NY sessions), for where there's a freeding frenzy with lots of other "yummy little fishes" you just tag along and eat what comes your way. Otherwise, in a quiet market... you run the risk of being eaten by your "shark"!

So, remember... be a REMORA! :-D


Sameer said...

Thank you very much for your articles. Good information.
PS: Could you be my sensei.

MiniBahn said...

Hi Sameer, many thanks for your kind words.


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