Friday, November 7, 2014

Tracking The Dark Pools


Velocity Runs Out Of A Bottom

Dark Pools use precise controlled orders that trigger automatically over extended periods of time. Since these institutions are primarily buying for the long term, price can sometimes drop down before moving up. This tendency often leaves retail traders on the wrong side of the trade. Using an indicator that exposes the Dark Pool incremental buying gives retail traders an edge even High Frequency Traders HFTs do not have.

Below is a chart example of Sapient Corporation (NASDAQ:SAPE) which was under quiet accumulation by Dark Pools for several months. During this period, the stock slipped down slightly but remained well within the “buy zone” that the Dark Pools had created.


The enormous volume that occurred on the day of the HFT gigantic gap up distorts the volume.
Below is a chart example of how the volume appeared prior to that big gap.


HFTs attempted to sell the stock down a couple of times but Dark Pools were triggering buys during that period of time. Smaller funds were following HFTs with Volume Weighted Average Price VWAP and often sold when they should have been holding. Smaller funds managers typically have less experience and rarely use individual stock technical analysis for their buys and sells.

The Drop Down Pole Vault Candlestick Pattern, which is one of the new candlestick patterns that form due to Dark Pools triggering on a sell down by HFTs, was the pattern retail traders needed to recognize. An ideal Springboard candlestick pattern formed for a good entry with low risk for retail traders.

Then the stock experienced several days of fast running momentum and huge volume spikes.

Summary:

Often times retail traders who only learned a strategy and have been whipsawed out of trades, sometimes develop a belief that setting a specific point gain for a brief hold period is lowering their risk.

Unfortunately this strategy that is very popular and taught in many areas of the internet has two major problems which are the following:

  1. The shorter the duration of the hold, the higher the risk factors.
  2. Limiting your profits rather than letting a stock run as far as it will go.

Shorter duration trades increase risk because if the stock goes against you, your limited hold takes you out at a loss. Volatile intraday conditions hamper day traders, and most encounter chronic losses only to see that at the end of the day the stock actually moved up.

Limiting profits is foolish. Professional traders know that excellent runs with fast moving momentum should be allowed to run out with a volume exhaustion pattern or extreme patterns. By allowing a stock to run its full and complete run, professionals rode this stock up for huge profits in a few days. Meanwhile most retail traders either exited too soon, or some even took a loss on an excellent trade that moved strongly.

Learning how to trade velocity runs is critical to the success of swing, day, and momentum traders.


Trade Wisely, 

Martha Stokes CMT

Instructor & Developer of TechniTrader Stock and Option Courses
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