Did you know there are more than 100 order types and algorithms out there?
That’s right… traders have access to more than your traditional market, limit, stop-loss, and buy-stop orders. You know, the ones we retail traders have access to.
Why are there so many order types out there?
Well, brokerage firms hired some of the best and brightest minds to cater to the “smart money”. Basically, these order types help sophisticated traders limit risk, get the best execution, remain anonymous, and get better prices.
It doesn’t take a rocket scientist to figure out why these order types were designed… it’s probably because the smart money paid a ton of money to hide their trades when they place bets on non-public information.
The thing is, there’s a pattern to how the “smart money” operate, and if you just understand how they execute their trades in the shadows… you’ll be surprised to find they consistently find some explosive opportunities BEFORE the news comes out.
So what are some order types Wall Street’s largest players use and how can you legally piggyback off their every move?
Professional traders are no strangers to hiding their trades… they use order types and algorithms that some of us have never even heard of. Among some of the most widely used execution techniques include:
- Dark Ice
The VWAP Order
The Volume Weighted Average Price (VWAP) algorithm provides traders with the ability to get their orders filled at the “best” price.
The whole idea here is that if they can execute their trades right around where most people are buying and selling around… they can slice up their trades and it’ll execute and adapt to the price changes.
Sounds amazing, right?
Just entering an order and a price… and the order adapts as more price and volume information come in.
Here’s how it works… when you look at the chart in Apple Inc. (AAPL), you can see something interesting happen with the VWAP.
In the 5-minute chart over the last 3 days, you’ll see a line tracking the price changes. That’s the VWAP line.
As you can see, every time the stock broke below the VWAP (the blue line), the stock just caught a pop.
That’s exactly what the “smart money” and hedge funds do. They put in a VWAP order and a deviation… and spot some of the best entries. Best of all, it allows them to slice and dice their orders up so they don’t impact the market too much when they’re accumulating shares.
Another algorithm the experienced traders use is the time-weighted average price (TWAP) order algorithm.
This is very similar to the VWAP order, instead of using volume to find the right execution price… it uses time.
Basically, once these Wall Street pros enter a TWAP order, it calculates the TWAP from the time the order was submitted until the market close. This order only executes the order when specific criteria are met.
It’s just one of the ways for Wall Street whales to execute their trades instead of hitting the market with a massive block.
This helps to remove some of the small trades that go off when the VWAP is calculated (these guys don’t care what the little guy is doing because they refer to us as “dumb money”).
Again, they’re able to slice up their massive orders into small ones that get executed throughout the day… increasing their anonymity.
Dark pools aren’t new… in fact, they’ve been around since the 80s. For decades, Wall Street’s elite have been hiding their trades in these trading venues and placing well-informed bets… raking in millions and hurting us everyday traders.
There’s an order type algorithm known as “dark ice”.
It’s ultra-private and smart money traders could place “iceberg” orders. Basically, the professional traders could enter a trade that gets executed off the traditional exchange… and no one can see these trades go off unless they have access to technology that detects “dark pool trades”
The iceberg order allows the largest players to place block trades that get broken up into tiny pieces that get executed, and helps to minimize price impact.
That’s right, when they use the “dark ice” order algorithm, it makes it extremely difficult for the SEC to crack down in real-time.
That’s why we see “insider trading” rampant in the market, and just take a look at what happens when you look for “dark pool” trades.
Taylor Conway has figured out a way to uncover these “insider trades”, and the thing is… you can legally piggyback off the “smart money’s” best ideas.
Well, all we really know is the order flow — nothing about the information. Just the fact that someone is buying or selling.