Monday, December 3, 2012

Volatility Part 3


MetaStock SPRS Series - Week 97 - TechniTrader® Stock Discussion for MetaStock Users - Volatility Part 3 - December 3, 2012
By: Martha Stokes C.M.T.

As we discussed in the past 2 weeks, volatility is not a random event. As with everything in the market, there is cause and effect involved. Many traders are surprised by volatility and get whipsawed out of a trade unexpectedly. Understanding the what, when, where, how and why of volatility can help you anticipate and prepare for volatile price action.

We studied “what” is of volatility in week 1, and “why” volatility occurs and “where” it is mostly likely to show up in week 2 of these discussions.

This week we are going to study the “when” of volatility. When can you expect volatility to erupt in price action causing major fluctuations and wildly speculative and unpredictable price action.

Volatility is tied to the collision of diametrically opposed forces:
  1. Dark Pools selling or buying incrementally huge share lots over time.
  2. HFTs, smaller funds, and the Sell Side Market Participant Groups.
Volatility tends to occur at 2 primary locations on a chart:
  1. As a Top is about to commence
  2. As a Bottom is about to commence
Therefore recognizing volatility early allows you to identify a top or bottom early. This means you are able to trade with more knowledge and understanding of who controls price.

Dark Pools have the largest sums of money to invest. Dark Pools are both Buy Side and Sell Side institutions. They can include mutual funds, pension funds, hedge funds, market makers, and banks.

High Frequency Trading Firms have the fastest trading platforms, trading on the millisecond creating huge volume surges. BUT they do not have the vast sums of money at their disposal that the Dark Pools have.

So invariably it may look at first as if the HFTs are controlling price and will maintain the integrity of the trend up or down but in fact, the Dark Pools always have the advantage over the extended period of time. Eventually HFTs will abandon the stock in their constant quest for fast moving stocks.

Dark Pools are so dominant that they are the primary cause of a stock topping or a stock bottoming.

Dark Pools as an example, were rotating out of AAPL months before it reached its final all time high and then collapsed.

Volatility entered AAPL as Dark Pools took advantage of the speculative environment surrounding AAPL, as gurus and recommendation services promised investors that AAPL would go to $1,000.00.

As the Dark Pools sold incrementally, it placed more and more pressure on the downside. Retail traders and independent investors buying, could not keep up with the steady outflow of money from AAPL by Dark Pools, so eventually a top formed and the stock collapsed as retail buyers evaporated and more and more selling started.

Understanding the cause and effect behind volatility is crucial for successful trading and investing in today’s complex market structure. With a full 9 Market Participant Groups in the market today, identifying WHO is in control of price is most important.

When you are able to do so you will earn higher profits, avoid weak trades and whipsaw trades, and will be better prepared for corrections and bottoming action.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
http://technitrader.com
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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