Institutions follow a systematic process that tends to give them a great advantage over retail investors and traders. It makes them profit consistently while others accumulate losses. I will give you here the complete 8-step process to trade and invest like institutions, and you can start to make those consistent gains!

In my first article on this website, which was called “How Institutional Investors Do It“, I spoke about the 2 differences between institutions and retail investors and traders, and I gave a very brief mention to what they actually do. But, for the first time, you can actually find an exact step by step guide to the process they follow to get there.

One of the main factors behind the failure of the majority of individual traders and investors is that they follow certain ideas without thinking about them for themselves. They might use technical indicators or follow some fundamental analysis for recommendations to decide on their trades or investments, but, unless they follow the proper steps to get to that decision, they are just setting themselves up for guaranteed failure.

The methods I am explaining here have been used by institutions for decades, and they are timeless and they don’t get old. If you are serious about trying to make consistent gains from investing and trading, then you need to follow these steps without skipping any of them! Otherwise, you are just another failure statistic waiting to happen.

You probably haven’t heard of these steps before because no one talks about them. People who work with or for institutions are not interested in talking to retail investors and traders, and the concepts discussed here can sometimes be perceived as too complex. But, I shall explain them in a very easy and simple way, and you will be able to follow and understand them.

This process is for what is called a “top-down” approach. By top-down, we mean looking at the bigger picture first, before making decisions about individual trades or investments.

Step 1: Macro View

The first step needs to always be related to how you look at the world and your own expectations of the economic and political scene. This is what we call the “macro view”.

How does this affect individual trades or investments? We can look at the events of 2020 as a good example to see how this works.

Due to the world locking down, think about which industries lost the most and which ones gained. For example, airlines and cruises would have made for very bad investment decisions, since these were two sectors that suffered greatly from the world shutting down. On the other hand, companies providing services like online meetings saw great success this year.

Another example would have been the flow of money out of oil companies and into green energy providers on the back of the US presidential election results.

Themes like these are super important to note before even thinking about the next steps, because they lay the foundation to everything we should be doing later on.

But, this is for equities (or stocks). What about commodities and forex? The same goes for both.

If we think about commodities in 2020, when the world shut down, there was no longer any demand for oil, and that meant there was huge oversupply, sending oil prices crashing down. On the opposite side, people who were still getting financial support from their governments wanted to put their money into safer investments, so they bought gold, sending gold prices to all-time highs.

In forex, currencies are also affected by political and economic events. We saw how the Sterling Pound moved every time there were news about Brexit. Or, with some currencies which are linked to commodities, such as Swiss Franc and gold, for example, movement in the currency can be related to movement in the commodity price.

As you can see, it is really important to always know what’s going on from a macro view in order to make the right decision about your investments or trades.

Step 2: Themes

The second step, after deciding on your macro view, is to decide on what themes are going to be the strongest.

If we continue from the examples we’ve discussed above, we could look at the two themes of airlines and online services as the two opposite ends of the spectrum. If we were making our decision back in April 2020, when we expected the world to be locked down for a very long time, we could have easily said that we didn’t want to do anything with airlines and focus on companies providing online meetings.

And, this was exactly what happened in the markets! Institutions were very quick to transfer their money between these two industries.

There were some other themes that weren’t as convincing or as strong, and trading these themes was not as dramatic. An example of this was how markets reacted to prices of corn, wheat, or even silver. People didn’t know how these commodities would be affected by the political and economic events, and trading them was just not as clear as other themes.

So, find the themes that you are convinced with and that you see have strong foundations.

Step 3: Theme Duration

The third step is going to be deciding on how long you think the theme is going to last. For investments, you want themes that will last at least a year or two, or, for longer term investments, you’ll even want themes that you believe could last decades. As for trading, you’ll be looking at themes that have quick and sharp effects on the markets in the short-term.

The duration of the theme is going to be one of the strongest keys to unlocking your profitability in the period you are expecting your trade or investment to last.

Step 4: The Shortlist

The fourth step will be creating a shortlist of the instruments you want to invest in or trade.

Once you’ve decided on the theme and the duration of the theme, you then need to look inside the theme to see what companies, commodities, or currencies that relate to your conclusions will be best placed for benefiting or losing out from this.

Notice that we are halfway through the steps and we haven’t even discussed prices, valuations, or charts yet! They are coming up, but they can only be done after laying the proper foundation.

This initial bit of research that goes into creating the first shortlist will open your eyes to a lot of ideas and make you understand more about the sectors or industries you’re looking at, which always comes in handy if markets start to act irrationally, since you can be reassured with your foundation and stay your own course.

Step 5: Prices & Valuations

In step 5, we’ll start to look at prices and valuations. For investments, valuation is the most important factor you should be looking at. The valuation can also be found on websites as the “target value” or “fair value”, which is the share price analysts have reached by valuing the company. This is reached by analysing the company’s fundamentals, looking at the industry it’s in, its operations, management, future prospects, etc. This is why it is called “fundamental analysis” or “fundamental fair value”.

When you invest in a company, you are then a shareholder and you should care about it as your own company; after all, you own part of that company. So, from your shortlist, you need to write down the target price for each of the companies and then look at which ones are undervalued to decide which ones you’ll actually be considering for your investment.

For trading, the story is quite different. You are looking at price movements over time rather than the fundamental price targets. Prices do not always move due to fundamental factors, but they always move with market sentiment and speculation. A good example of this is the recent panic that happened when Facebook faced litigation in the US calling for its breakdown. We saw all tech company stocks fall regardless of what these companies actually do or whether they might face similar lawsuits. The sell-off was due to market sentiment just not wanting to do anything with tech, and ignoring the companies’ growth, sales, or any other such factors.

Traders have to be aware of these price movements and what cause them, while investors don’t always care about such moves, because they make their money by being shareholders in a business, while traders make their money by buying and selling the shares.

Investors could have also seen this fall in price as an opportunity to buy shares, especially in companies on their shortlist that seemed overpriced before, and now could be at a price that justifies the investment.

Following price movements for trading is done through “technical analysis”, where traders look at charts and use certain indicators to analyse historical patterns to try and predict future price behaviour.

I believe this is where the main difference between retail traders and institutions comes into play. Most retail traders would look at the charts and indicators, follow some theories, without much knowledge of the dynamics of where the movements come from. Institutions, on the other hand, would have to look at catalysts before taking any trade.

Step 6: Catalysts

Step 6 in the process is about finding catalysts. If there is one lesson that any trader should learn is that they should never take a trade without having a specific catalyst in place. Even if the catalyst is speculative, it has to be present.

For example, a company releasing their earnings in a week can be the catalyst needed for the price to move. If you expect the company’s results to be better than what the market thinks, then you would be expecting the share price to go up, and that may affect your trading decision.

We saw this clearly in the run up to the U.S. Presidential elections, where certain share prices of companies and sectors moved with the news of who was in the lead and the expectations every time poll results were out.

The same goes for investments, but with slightly different outlook. Investment catalysts could be factors that may take years to develop. Some recent examples of this are software development for self-driving vehicles or space exploration. These two are examples of potential catalysts that may take years to develop, but one can argue that they could be game changers for companies involved in developing them.

Others could, for example, argue that oil may be a dying source of energy, so they would stay away from energy companies only relying on oil, but could shift their focus to companies with more involvement in green energy, with a possible catalyst of expected new laws or regulations regarding emissions, for example.

Catalysts always have to be present in your decision to invest or trade.

Once the above 6 steps are completed, the decisions are then to be made about entries and exits. For investors, these would be related to their fundamental fair value, as discussed earlier. For traders, it’s all about the charts.

Steps 7 and 8, while mainly directed at traders, investors can certainly benefit from them in their final parts of the decision making process.

Step 7: Timeframe

Step 7 is about choosing timeframes. One of the main questions traders tend to ask is about which timeframes to use.

Remember step 3? You’ve decided on the expected period your theme will last for. Combine this with the catalysts you’ve identified in step 6, how long you think they’ll go on for and how far away in the future they are, and you can decide on your chart timeframe.

A catalyst that may be happening during the day means that you’ll probably be looking at very short timeframes for intraday trading. 5 minutes, 15 minutes, or 1 hour are commonly used for these. A catalyst happening at the end of the month could make you move on to the 4 hour timeframe, since your trade is more likely to last for days or even a couple of weeks.

As for investments, you’ll want to look at weekly and daily timeframes, which should give you a better picture of what to expect over the long period of time you’ll be holding your shares.

Step 8: Indicators

Step 8 is about choosing the indicators to use on your chart. There are so many indicators that technical analysts use, and these can differ from one instrument to another and from one timeframe to another as well. But, there are some indicators that I always use as a starting point.

First, I have a few moving averages on the chart, volume, MACD, RSI, and the Lux Algo indicator, all of which give a very good initial view of where things could be going. You can check out our article “How We Use Our Charts” for some details on these. I’m not going to go through details of analysis here, but I just wanted to say that there are certain places to start, and that the analysis for one instrument can be completely different from another.

You need to do your own research into which indicators you should be using, since the ultimate decision is yours.

If you do not follow these 8 steps for each and every trade or investment you’re going into, you should expect to eventually have some massive failures that could wipe out any gains you might have had in the past.

While these steps are simple, I realise that they might not be easy to complete by everyone. This is why there are those who last longer than others.

My job for many years has been doing the research part for institutions, looking at the macro picture and market dynamics, finding catalysts, and giving my opinion on these. I have basically been doing the first 6 steps for them, and they only had to take the last 2 steps of deciding entries and exits for their investments and trades. Of course this is a simplistic view of what they do, but this is pretty much it.

This is how I know this process inside out, and I hope I was able to explain it clearly.

Good luck!

(Written by Hassan Afifi)


Disclaimer: All material provided here is for educational purposes and should not be considered as financial or investment advice. We do not offer any services related to investment advice and we do not sell any financial services. Our articles, reports, videos or any other material is for general educational purposes and should be treated as such. You should always seek advice from your investment advisor prior to taking on any investments or going into trading. Trading and investment involves risk of losing your money.

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