Monday, July 30, 2012

The Superior Indicator Most Traders Don't Use...

MetaStock SPRS Series - Week 79 - TechniTrader® Stock Discussion for MetaStock Users - The Importance of Price, Time, and Quantity Indicators - July 30, 2012
By: Martha Stokes C.M.T.

For all of my followers who read this every week:

I have been invited to speak at the MetaStock Conference again this year. I will be teaching a hands-on trading session and yes, the entire presentation in PowerPoint will be printed by the staff at MetaStock for you to use during the training and to take home with you. I want your MetaStock Conference experience to be a memorable one and highly productive for you. If you follow me, be sure and introduce yourself at the conference. I will have some time to work with students and others after the session.

This week I want to review why it is so important to not only use price and time indicators but also quantity and time indicators.

As I tour the country and speak with many traders of all levels of experience, trading styles, disciplines, and strategies, one theme continues to plague their success. Most retail traders use too many price indicators and not enough quantity indicators.

There are 3 primary data that comes from the stock market that MetaStock uses to create the charts that you use every day.

  • Price
  • Quantity
  • Time
It takes 2 of these to create an indicator. When all 3 are used in an indicator, that indicator tends to lead and is far superior to mere price and time indicators.

So why don’t more retail traders use price, quantity, and time indicators? Many retail traders are stuck back in the old days when all that really mattered was price.

You need to keep your trading current, your tools up-to-date, and connect with the market structure we have today. If you use outdated indicators which are old-fashioned technical analysis, you will not make the profits you could have made if you had maintained a cutting edge in terms of tools, indicators, strategies, and methodologies.

Right now, High Frequency Traders HFTs rule intraday and can cause trend changes with one day of action. With so many small funds managers, retail traders, and small lot investors chasing or reacting to the HFT activity, not paying attention to quantity indicators is a major flaw in any trading system you decide to use.

Below is an example of how HFTs move the markets on the short term trend. This example is a range bound stock. The range was created by HFTs actively trading this stock due to its frequent news feeds. HFTs currently are using formulas that capture news as it streams down the internet toward retail side news websites. By catching these news feeds prior to this information actually landing on the retail side of the market news websites, HFTs control the market open and the intraday activity.

HFTs depend upon that second or two second lead time on the news to trigger their automated formula order flow that initiates on the millisecond time scale. By trading a thousand times per second, they are able to capture pennies or fractions of pennies and net profits.

Chart 1

CVX has been actively traded by HFTs over this past year. The super huge volume is their “footprint” that clearly marks their millisecond trading activity. TechniTrader® Quiet Accumulation TTQA shows how smaller funds and some large funds are short term trading this stock. CVX has 1681 Funds holding its shares with 1512 of those funds active during this chart time line.

Since this stock is in the news often, HFTs can take advantage of the emotional response to that news by retail traders who assume the news is for their benefit, small lot investors who buy stocks like day traders assuming the news is accurate, and small funds managers who are told to buy these stocks from the services that cater to small funds managers.

To be successful in today’s lightening fast market activity with HFTs trading on the millisecond, the pros trading with them, and all the other market participants groups rushing around, it is critical that retail traders know: Who is in control of price.

Who is in control of price at this time in the market? Which market participant group is controlling price action up or down? If you know the answer to this question and if you know how that MPG footprint appears on both price and volume, you are going to be one gigantic step ahead of the crowd mentality and you will be far more profitable.

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
MetaStock Partner

©2012 Decisions Unlimited, Inc.

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