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Hey guys in this module we're going to be covering the different players and how are you going to trade
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against different participants. In the last module,
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we've talked about the book and how orders affect prices.
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So let me ask you this.
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Imagine you knew what other people wanted to do.
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Right.
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It would have been easier for you to predict where the stock market is going to go.
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So again with the same example that we've covered in the previous model imagine there's 10 people and you
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know that one of these people is somebody who owns, and you can look at the notes from that module,
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there was a participant that owned 40,000 shares out of the company that had 75,000 shares of float.
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So he owned a majority of the shares.
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Imagine that you could have known that this person wanted to sell some of these shares.
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You would know that the price might drop because such a big player who has so much shares if he wants
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to sell,
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we've seen that prices are going to fluctuate because of his order.
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If he sends and order to sell, prices will fall.
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Now different players trade differently and this is something you have to understand.
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A mutual fund, or somebody who has a lot of shares is not going to trade like somebody who is just
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sitting at home,
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a retail trader. Again, the same thing in poker or in different sports and different sectors, different
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participants participate differently.
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So in this situation if you knew that that person has a big mutual fund, has 40,000 shares what could
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you know? You could know that as a mutual fund or a big institution he's going to try and sell his shares
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when there's a good news because that's the only time he's going to be able to unload so many shares.
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He can't sell shares when the stock is going down because he'll just make the stock tumble.
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So he has wait when there is it good news for there to be enough buyers
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so he can sell them those shares and unload his shares.
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So if you knew that somebody was a big mutual fund and he wants all the shares you might sell in
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front of him.
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And if there's a good news that come out, you're not going to buy right away because you know that there's the
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seller. And this is why a lot of times you're going to see a stock that has very good news and then it's
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going to drop 10%
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And people aren't going to understand
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Why? The news is good.
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Why did it drop?
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Well maybe because a big mutual fund wanted to sell it's shares and they are known to sell on good news.
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So it wouldn't have been....
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Wouldn't it be helpful for you to have known that this specific stock has a lot of institutional ownership?
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Has a lot of mutual funds and hedge fund ownership?
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Yeah it would have.
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And this is information that's publicly available but it never me ceases to
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amaze me how many people don't know about it.
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And some people might tell me "Well I have this stock" and I ask them "What's the institutional ownership on that?"
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"I don't know."
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Well how can you not know? You're trading the stock wouldn't you want to know who you're trading against?
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Because at the end of the day trading is a zero sum game and what it means is for every dollar that
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you put in your pocket, it came out of somebody else's pocket.
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So you want to know who you're playing against
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Because that's the person you're taking money from.
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Same thing in poker if you will play at poker and you're at the top level of poker players,
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you're extremely experienced.
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At this top level
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what do you think differentiates these players?
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They all know how to calculate probability.
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They can they can calculate the same odds of how much they can win or lose, they're all as good as
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playing their turn or their hand depending on what position they're playing.
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So when they're going to play at that high level they study the other players that are going to be playing against.
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What's their style?
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Do they bluff a lot?
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How do they play?
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How do they call? So that way they have every advantage they can have.
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Same thing in sports if you're get into the finals and how you're playing against a team you're not
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just practicing to be a good basketball player at that level in the championship, you're going to practice
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specifically for that team because they play in that particular way.
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Same thing in stocks.
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Prices are going to move because of the buy orders and sell orders that people are sending or the participants
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are sending.
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So you got to know who are those participants because they're going to send orders in a different type
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of manner.
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So that being said for every stock that you're going to trade you want to know what is the institutional
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ownership on that stock.
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Is there a lot of institutions that own that stock?
Like Facebook has 70% or higher or does it
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have no institutional ownership?
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So there's a lot of things that have zero institutional ownership.
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So it's all retail floats, all retail people who are buying it. And stocks trade differently for... or
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strategies work differently for stocks that have high institutions and stocks that have low institutions.
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Low institutions, retail are easily likely to explode in a direction or another because on good news
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retail are just buying, they're not going to offload on good news.
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And for different reasons which we'll cover in more specifics in another module.
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But keep in mind this is something that you're always going to have to watch out for, the players that
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you're playing against. Now really quickly.
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Who are the different players?
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First off you have proprietary trading firms, which is like us, now proprietary trading firms are
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smart. They're considered smart money they know what the're doing.
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So they're trying to take advantage of small inefficiencies in the market and get in and get out quickly.
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So these guys have a lot of tools and information and access and commissions and fees.
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So they're very competitive.
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Another type of players are investors. Now investors they just come in and buy stocks and they
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keep them for a while.
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OK so they're not trading they're putting in money and leaving it for a longer period.
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You have your retail traders. Now retail traders are traders who trade from home who don't have a lot of sophisticated
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tools or information or strategies. Now for these people that's considered dumb money because it's easy
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money to make.
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So as a trader or as a professional trader, somebody who does this in a smart manner,
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you want stocks that have a lot of retail flow because again you're getting money from somebody so
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you want to play against people who aren't as smart as you.
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Portfolio Manager which are mutual funds. So these are big funds. A mutual fund is a big
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fund that people put money in and has a portfolio manager the portfolio manager oversees those funds
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and buys and sells stock
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with those funds. So it could be hundreds of millions of dollars following a prospectus that the clients agreed
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on.
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So you know he might say I'm putting 20% in financial stocks 20% in gold stocks and he's
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going to fall back and but he's going to pick and choose the stocks that he thinks will make you the most
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money.
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Mutual funds haven't been performing very well in the past.
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They actually perform worse than ETF. And we'll cover ETF in more detail in another
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module but if you just put your money in the markets you'll actually outperform mutual funds.
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And the reason for that is because mutual funds the portfolio manager takes a manager expense ratio
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so he takes a fee every year about 2%.
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And this kind of adds up it takes away from the money you get.
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And he doesn't actually do well enough to beat the market.
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So mutual funds aren't really good
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put money in.
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You're better off taking the time to select your stocks
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even if you're an investor. But it is one of the big players because mutual funds are going to buy a
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lot of shares in a company and when they sell they sell lot of shares.
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So you're going to have to know about that and you can know which mutual fund has which stocks
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in their holdings.
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And you can know how they're going to trade those stocks just by knowing that they have it because it
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is known that when mutual funds have a stock that's been performing very well,
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they're going to try and remove money from that stock to take some money off the table, take some profits
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off the table and put it in something that's still undervalued and that's not overvalued anymore.
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So we can guess what other players are going to do.
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And by guessing what other players are going to do we can guess what the stock is going to do. Becasuse at the end
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of the day
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you're not trying to guess where the stock is going to go.
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You're trying to guess what other people are going to do because what other people are going to do is
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what's going to drive the stock to go in that or this direction.
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So don't try and predict "Is that not a good company is this stock not a good company."
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What you want to do is try to predict
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how are other people evaluating that stock? Because of that evaluation that's what's going to drive their
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orders
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and because there are orders that's what's going to drive prices.
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So you want to know what other people are going to do from now on and in the future.
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Other type of player is the hedge funds. Hedge funds are very smart money they're like mutual funds, big
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capital, not anybody can put money in a hedge fund.
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So you have to be somebody who's rich enough because there's very strict minimums and hedge funds can
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do more than mutual funds so they can go long or go short which we're going to cover
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And another module will go in for this.
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So hedge funds can do all of that.
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They're way more sophisticated than mutual funds, they're smarter,
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they tend to make more returns and they're very very discrete.
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So we can't really know what positions they have up until several months after so when it's
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too late.
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So hedge funds we can't really know about.
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But these are the top players.
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And for every stock that you're going to trade from now and every strategy you're going to look
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at institutional ownership and base your strategy on that.
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So this is going to conclude this module and I'll see you guys next one.
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