“Even the experts can’t beat the market, why would you?”
You’ll hear this or something similar to this anywhere you search online, and if you play by the same rules the large hedge fund managers do, you’re right.
If you follow my channel though you’ll know we don’t play by the same rules as the billion dollar hedge funds do.
We make our own rules and adapt our strategy to be profitable under any market conditions, but if we can do it, what’s stopping the big money managers from doing the same thing?
The answer to this sort of lies in the economics of how the market works.
We’re technical traders, which means we study charts and design our indicators for precise entry and exits so we don’t have to make judgement calls on where we think the market is going to go.
Related: How to become a technical trader, and why you should
But, if you’re like me, you’re not content to just have a strategy that works. You want to know why it works so you can be sure it’s going to keep working for years to come.
All of us trade in the same market, the hedge funds, the retirement savings, the day trader all could be trading the same stock and what most people think is because we’re all trading in the same market.
The rules are the same for everyone
We know this is not true, because if it was, we would be struggling to beat basic market returns like everyone else.
But we’re not
And the reason why is kind of counter intuitive because it comes down to the way a strategy will scale in the market.
What this means is that some strategies work really well on a small account, but as the account gets bigger it becomes a lot less reliable.
When I say a big account I don’t mean your 100 thousand dollar account or even a million dollar account. Our strategy will work pretty much without any major issues until your account size gets close to the 100 million dollar mark
and even then with the skills you will have learned by the time you’re managing an account that size we can adapt our strategy to still easily beat market returns until our account gets to the 1 billion dollar mark.
At this point is where we start running into major issues with the way our trading niche works,
but it also explains why things like fundamental analysis and growth potential are so important to the big funds while we can basically ignore them.
There is a finite amount of volume in the market, and for swing traders, the only reason that we are able to make so much money is because the long term traders are controlling which way the market is moving and we are using our speed to get in and out of the market before the trend changes direction.
If you want to try this out, find a stock that doesn’t have a lot of volume and try and trade with it
You’ll notice very quickly that you almost never get in even close to the price you wanted and by the time you get out this slippage has negated nearly all, if any profit you would have made.
For a large fund, every stock is like this almost no matter how much volume it has. They are playing a different game precisely because their fund is so large.
If Berkshire Hathaway for example closes a large position in a stock it always makes headlines and many other investors who trade the news might even trigger a mass selloff.
And depending on how big the position they had was, there might not be enough buyers in the market for them to sell to and so maybe the first half the position closed at the desired price, but they have to factor in a lot of slippage as finding a single buyer for that large of a position is not easy to do.
This is why things like getting priority in the market and having very precise advanced technology is so vital for them.
It’s also why during a recession, they have to take the big hits,
While we can get out of the market before the real damage is done and maybe even go short to continue to profit. The best they can do here is try to hedge against as much damage as they can which also can be a huge drain on profits.
This is also why if you’ve ever tried to learn how to trade by following the richest investors you probably haven’t had much success.
Getting a 10% gain on a billion dollar account still looks like a lot of money, but that same 10% gain on your 10 thousand dollar account is barely worth your time.
But the big funds actually rely on the majority trading by the same rules as they do,
And they know it too, this is why so many of them preach fundamental analysis and determining which companies have the largest growth potential.
Because their profit relies on their ability to spot which company is the strongest or most likely to grow faster than you can. If they can get into a stock like amazon even days before everyone else determines they’re a worthy buy then they can maximize the amount of profit they make on the trade and that slippage will matter a whole lot less,
But for this to work people have to be looking at the same metrics they are, this is why getting that knowledge faster and insider trading is so popular.
If you play by their rules of course you are going to lose because for the most part they made the rules and the SEC enforces the rules for them to ensure that you play by them.
Related: How to get started as a trader
It doesn’t have to be this way though, every system as large as the stock market or as complex as the law is going to have sections that are overlooked or that the masses think are impossible
And what we can do is find out what these are and try to quantify them as an indicator.
This is why many of the older indicators aren’t as effective as they once were. The big institutional traders know there’s people out there trading them and to maximize profit they trade around them.
As a group we no longer have to rely on these old tired indicators because we are constantly testing new ones against the market and since there are more of us we can adapt much faster that the large institutions can.
Related: How to create your own custom indicator using tradingview
As I’ve covered previously, if you know what to look for, it’s easy to come up with one that is consistently better than many of the most common indicators.
If you’re still having trouble coming up with your own indicator though check out my guide on how to create and use your own custom indicators.
And if you haven’t already, sign up for my email newsletter to get access to the latest market information and also a free indicator that will immediately get you started off trading the money mercenaries way.