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Learn to Trade Like a Hedge Fund Manager

Why are hedge funds so much more successful than the average individual trader?

Sure, not all hedge funds are successful but their rates of success far surpass those of the rest of the trading public.

Are they really just that much smarter? What drives their competitive advantage?

Below I will break down ways that you can change your approach to the markets to trade more like an institutional trader and less like the average retail trader.

Capitalize on Institutional Advantages

There are 4 main advantages that institutions have. We’ve discussed these before but I want to review them again here.

  • Capital – This is the institutions main advantage. Most of their competitive edge is derived from the fact that they have access to large pools of capital. This allows them to afford the best technology, manpower and gives them the leverage to trade positions that retail traders wouldn’t be able to.
  • Information – Institutions have better access to information. We know that the vast majority of institutional traders are honest and play by the rules but there are many who take advantage of insider information and use it in their trading. While we do not often hear about insider traders getting caught an insider executes a trade every day.
  • Manpower and Technology – How many hours a week do you spend doing market “homework?” By this we mean any research or educational activity related to your trading done outside of regular market hours. No matter how much time you spend, you are always going to be limited by the fact that you are one person trying to consume and analyze information. Institutions have teams of analysts pouring over every single piece of publicly available information trying to form an informed opinion about a specific stock.

As you can see above, these advantages are not exactly something the average retail trader can compete with.

However, there is one way for the retail trader to leverage these institutional advantages without having direct access to the same resources.

Unusual options activity.

Using Options Flow to Your Advantage

Unusual options activity is defined as an options order that takes place above the average daily volume in a stock.

These unusually large orders and spikes in options volume can show us where institutional traders are placing their bets on any given day.

We can see where they are pressing shorts on a day the market slams lower, or where they are buying protection in names that are making new highs.

These trades are the end result of all of the advantages we listed above. If we can identify them then we don’t need the institutions capital, access to information, or manpower.

We are able to get the end product, their trades.

While the process for finding actionable unusual options trade setups is far more complicated than simply identifying unusually large volume the end result is that retail traders are able to use this orderflow to structure their portfolio with positions that are based on where institutional money is speculating in the market.

Putting This Into Play

While we didn’t cover exactly how to find these orders (more on that later).

You’ve already seen how a plan like this is put into play. I use unusual options activity everyday to identify and flag setups in my daily letter.

The reasons above make this my favorite way to approach the market as it gives me, a retail trader, access to signals generated b institutional traders with the above advantages.

Stay tuned for a more detailed explanation of the trading plan and how any retail trader can use it to their advantage.


Andrew Keene
AKA, “The Alpha Shark”

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Andrew Keene

Andrew Keene is the editor of The Alpha Shark research desk at Agora Financial. That includes the daily Alpha Shark Scanner PRO, the monthly Alpha Shark Letter and the bi-weekly CryptoShark Trader.

He’s also the founder of a seperate business called AlphaShark Trading which founded in 2011.

Andrew’s worked as a proprietary trader at the...

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