Except when he does not, of course. Adverse selection is a real thing and there are plenty of shops that discovered how it feels.
My point of view on trading changed radically in 2015 after I tried to make sense of a presentation by Ray DeMedici, after which I switched from focusing on trend to targeting key levels instead. This was the best I could do in terms of trying to decipher what Ray had to say... One of the main challenges faced by novice retail traders is figuring out what advice is good and what’s rubbish. That problem would be solved with access to the institutional side of the market, but for the vast majority of traders, that’s never going to happen, so they turn instead to technical indicators for help. But as you might imagine, institutional traders do not use $99 EAs to guide their actions. They use algorithms that cost hundreds of thousands to millions of dollars to develop. Stochastic oscillators, RSI and MACD do not figure into the design of their algorithms, so anyone relying on such is going to have a problem because indicators do not reveal the "why" of price action. You might see trend lines and say, "Okay, now I'll pull the trigger," or identify support or resistance and think, "That’s where I’ll enter," but do you understand why? Do you have some type of underlying rationale, or are you simply basing your decision on a mechanical, almost mindless assumption that, “If it was support before, it's going to be resistance now." Do you really think so? What does that mean anyway, because the fact of the matter is, this statement is not valid all the time, perhaps not even most of the time or we’d all be making a fortune, right? So the big question is: “When can these levels be relied upon?” When should you lean against them and maximize a size position? That’s the question you need to be able to answer. That knowledge will completely transform your trading. That’s what the institutions do. They understand whether levels are valid or not. You too need to know when they are valid and when they aren’t. Otherwise, you can purchase indicator after indicator and it won’t do you any good because indicators don’t provide the whole picture. In truth, you shouldn’t even be using indicators with the exception of market profile. Otherwise, you should be using levels and the response off those levels to make the picture clear. And you can’t just focus on one market or another. You have to pay attention to all of them. If you want to compete with the big boys, you have to understand what is happening with the S&P, the gold market, oil, treasuries, currencies—all of it. If you want to be a success in any one of these disciplines, you have to know about all of the others, and that doesn't just mean knowing they exist and what they’re called on the CME. To know what is happening with any given price going forward, you have to have all those charts available. You have to analyze whether it’s a risk-on or risk-off market, etc. And who said fundamentals are dead? In reality, it’s all about fundamentals because fundamentals are what drive the institutions—not technicals. More specifically, you need to learn how to apply the principles of institutional positioning. You need to develop the ability to analyze every single bar on every single chart and understand what is actually happening from a market structure point of view. There is a big difference between institutional prop desk trading and the kind of retail, demo or virtual trading to which most novices are exposed. Likewise with floor trading, whose players are more apt to understand about fundamental analysis, positioning, levels analysis, news, liquidity and so forth. If you only learn about profile, or volume analysis, or footprint, or trend, you're not getting the whole picture. It's not all about volume nor is it all about order book. It is a combination of everything—levels, volume, order book, etc. It is putting all of this together to understand what is likely to happen, and then being able to trade based on what actually does happen. High volume by itself means nothing. It simply means be on the alert. It means be watching for something. But you don’t make a move until you actually see something and you know what you’re looking at, such as a low volume tap back off of low level areas into high volume load, for example. It’s everything combined that gives you the market structure. And once you know what market structure is in place, you can look for where the institutions are going to be positioning themselves. You’ll know the levels the wise guys want to get price to, and in turn, profit from knowing where the institutions, the biggest players in the marketplace, need to go. When this becomes clear, you’ll be able to run two, four and five pip stops—not fifteen pip stops. (It really is possible to do this when you understand market structure!) Realize that before any of the biggest institutions take a trade, the first thing they need to know is where they’re going to exit or come out with liquidity. Also, they need to find buyers at higher price—not sellers—because THEY are the sellers. That’s something a lot of people fail to recognize. The institutions need to find buyers somewhere at a higher price, so they need to drive price to a level that encourages people to think that prices are going to go dramatically higher so they can sell into those purchases. Consequently, the areas you think are going to be where trading will occur are not exactly where it actually takes place, so you need to be able to recognize the trades that institutions use to assess the validity of the position. You need to grasp the entire concept, to know where the institutional positioning will be and where massive size is going to be put on so you can front run that massive size. You need to be able to look at the market, get structure, and then look at the trades that are getting put into place in advance—not after the fact. Remember, institutions need to buy when the market drops and they need to sell as the market rallies. That’s a given. They cannot buy when the market is rallying or they would be pushing price against themselves. So, you have to understand that the institutions are going to be buying when the market drops off, and they are going to be selling as the market goes higher. The biggest problem with this is that you can start buying, and then price drops, so you fade, and then it drops some more, more fading, and it drops some more, and you end up dying the death of a thousand paper cuts all the way down. That’s why you need powerful price analysis strategies. There are certain things to analyze as price drops (such as order book, liquidity levels, profile levels, order flow and a few other techniques) to assess validity as to whether the levels will hold or are likely to give. As you become knowledgeable about market structure, about institutional trading, you will begin to really see or read the market for the first time, understanding exactly how the “picture” should develop, and consequently, how to map out what is actually happening in real time. Every single day of the week your trading should incorporate market profile (based on 30-minute charts); floor pivots; institutional prop vs floor positioning; volume analysis (footprints); special situations (long and short squeeze plays, hedge plays, fundamental trades); daily fundamental bias; inter-market analysis (intraday bias); correlations (USTS, forex, Gold, major indices, oil, etc., and recognizing when these correlations have broken down and why); price action components and why they happen; compression; floor wobbles and why they happen; absorption and exhaustion (acceptance and rejection, minus development, low volume tap backs off of low level areas into high volume load, etc.); and liquidity. Clearly, a $99 EA cannot match all this. That’s why institutional traders have such a distinct advantage. I mean really, you’re not going to see a bunch of flashing wavy lines on their charts. For them, it’s all about levels. It's all about hedging. It's all about price and what is happening at certain points. It’s all about fundamentally driven information. Nonetheless, there are still certain advantages to being a retail trader because you can get in and out where the institutions can’t. The institutions can only play for size in certain locations, and your ability to recognize where those areas are means you can execute two different strategies: The first is trading into the institution size, knowing they are not going to come out until a certain price appears on the charts. Hence, you know where you're going to be able to take your profit and reverse. This is the safer strategy. The second is to actually trade with the institutions as they come out of these areas, which is riskier, but the potential upside is fantastic. Footprint charts tell you what is happening inside the (30-minute) bars so you can identify the points of high-volume. What we look for in a practical sense, is a location—a location on your chart will want to be selling or buying. But we still need to find a level where this makes sense. In other words, we make context out of high volume. So then, it's not volume analysis nor is it order book analysis. It is a combination of everything—levels, volume, and order book. It is a combination of understanding what is likely to happen, and then being able to trade based on what actually has happened. High volume all by itself means nothing. It simply means we are on alert. It means we are going to be watching for something. But we become sellers when we see low volume tap backs off of low level areas into high volume load. And when there is context to this high volume and there is a level at this high volume, we know there is institutional interest short side only at this level, and we see low volume tap backs into that area, we are sellers, and we will be selling exceptionally heavy into these areas with the stop being two ticks above the high volume. Whether levels will hold can be determined in advance based on inter-market analysis and fundamental analysis.
I think what this is actually talking about is trying to think like a participant that is being required to manage large exposure relative to other participants. The largest traders are moving the market so they're incentivized to stack and flip the speculative participants by forcing the market against it's previous movement -- exploiting a relative size advantage. This also ties into VWAP and how banks trade around it, which can be thought of as trading as a market maker.