Wednesday, November 28, 2012

Volatility and Trading


MetaStock SPRS Series - Week 96 - TechniTrader® Stock Discussion for MetaStock Users - Volatility and Trading - November 26, 2012
By: Martha Stokes C.M.T.

We are continuing our discussion from last week regarding the what, when, how, and why of volatility.

Volatility is not a random event. It is not something that has no foundation, nor is it something that serves no purpose.

Volatility serves a purpose and function that most retail traders do not understand.

Whenever the markets start experiencing high volatility two major forces are at odds. It is like a rip tide that moves underneath the waves of the ocean that you see. A riptide can cause major shifts in the direction, strength, and distance that the regular ocean waves travel. Therefore understanding the rip tide effect in the stock market, is crucial for success in trading any financial market.

It doesn’t matter whether you trade stocks, options, futures, commodities, forex or other trading instruments. Volatility will intervene from time to time.

Why does volatility occur?

Volatility is the collision of two major institutional market participant groups. The most common collision occurs when High Frequency action meets Dark Pool action. These diametrically opposed groups cause most of the volatility in the markets today.

Dark Pools move in silently, hidden in the realm of over-the-counter transactions. Their goal is to buy stock at a specific price range over a long period of time as they acquire stock for a long term hold. They are not hiding from retail traders whom they don’t consider a major factor, but from the HFTs that constantly seek them out with little program robots searching for giant fund accumulation. HFTs then drive price upward, the precise thing the Dark Pools do not want to happen during their accumulation.

Volatility is the dynamic action when HFTs are on one side of the trade while the Dark Pools are on the other side. As an example, Dark Pools may be trying to acquire 25 million shares of XYZ stock. They can’t purchase that much stock all at once, or even over a few days. They must establish a price range and then set an automated formula order processing system in place, which triggers a buy of 100,000 or 500,000 shares ever so often so long as the stock remains within that price range. These orders create a specific footprint on the VOLUME and VOLUME ACCUMULATION indicators such as TTQA and TTVA.

Note: Chaikins Money Flow and Chaikins Accumulation Distribution indicators are not volume based indicators so they do not expose Dark Pool accumulation.

When HFTs are selling short the stock then smaller funds, retail traders, and independent retail investors are either selling in panic mode, or selling short along with the HFTs. HFTs are therefore on the opposite side of the trade of the Dark Pools, who have determined that the stock value has reached their buy point. The result is high volatility which invariably creates the bottom. As HFTs try to sell short the stock, Dark Pools orders are triggering buying within their predetermined price range. Since Dark Pools tend to use a range rather than a specific price to get faster fill over time, volatile price action occurs. This is how most bottoms form and this is why most bottom formations are wide sideways action, with unpredictable up and down intraday and day to day price patterns.

Whenever you see a lot of volatility during a downtrend, be aware that this is probably the riptide effect. Volatility is not random, it is the result of two powerful forces clashing at a specific price range. Bottoms are formed due to this conflict, which then evaporates and turns into a compression pattern that builds the upside energy.

Always be aware of volatility when selling short as the Dark Pools will eventually win the price war. Their buying power is vast and their positions are usually huge.

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.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Wednesday, November 21, 2012

Main Tip: MetaStock Monitor NOVEMBER-DECEMBER 12

Main Article

Trading in the Shadow of the Smart Money
Contributed by Gavin Holmes

Volume Spread Analysis (VSA) is the underlying methodology of the TradeGuider "Smart Money" Tracker. The following examples of how professional activity is clearly visible in all markets and in all time frames, to those trained in VSA.

Volume Spread Analysis (VSA) is a proprietary market analysis method which was conceived by Tom Williams the Chairman of TradeGuider Systems International and former syndicate trader. VSA has its basis on the Richard D. Wyckoff method of analyzing market movement. VSA is utilized in the TradeGuider software to analyze a market by observing the interrelationship between volume, price and spread. This method highlights imbalances between supply and demand.

The TradeGuider "Smart Money" Tracker is unique. Driven by an artificial intelligence engine, this methodology plug in for MetaStock is capable of analyzing any and all liquid markets, in any time frame, and extracting the information it needs to indicate imbalances of supply and demand on a chart. In doing so, TradeGuider is able to graphically show the essential forces that move every market which are supply and demand, cause and effect and effort vs result.

The software works with either real-time or end-of-day modes, and enables users to see when professional money is entering, exiting, or not participating in the market they are trading, empowering clients to make more intelligent, timely, and informed decisions. Volume Spread Analysis (VSA) is a revolutionary concept that can be used on its own or in conjunction with other methods as decision support. The system combines ease of use with unique supply and demand analysis not found anywhere else. The extensive Expert System has an innate understanding of market dynamics combined with volume, which means that it is capable of analyzing supply and demand in any liquid market.

The indicators are displayed automatically on the chart. There is no configuration, no setting of parameters, and no optimization. Tradeguider's belief is that if a system requires optimization to make it work, then the base methodology cannot have been sound in the first place, since the process of optimization is used to cover up a whole range of flaws in the original analysis method(s). Tradeguider concepts are robust and can be applied to any time frame, with consistent results. The sophisticated Expert System is augmented by a novel set of proprietary tools, which ensure that any trader or investor can immediately follow the footsteps of the "Smart Money."

While volume in trading is not a new concept Tom Williams, who invented VSA, was a syndicate trader who could see the markets were manipulated and the key to unlocking the truth was in the relationship between the volume, the range or spread of the bar and the closing price. Tom Williams spent many years studying the concepts of Richard Wyckoff.

Richard Wyckoff was a trader during the 1920 and 30's. He wrote several books on the Market, and eventually set up the "Stock Market Institute" in Phoenix. "At its core, Wyckoff's work is based on the analysis of trading ranges, and determining when stocks are in "basing," "markdown," "distribution," or "markup" phases. Incorporated into these phases are the ongoing shifts between "weak hands" (public ownership) and "composite operators," now commonly known as "Smart Money." To find out more about Richard Wyckoff this website is worth visiting.

Tom returned to the United Kingdom from Beverley Hills in the early 1980's having made his fortune and began to investigate if it were possible to computerize the system he had learned as a syndicate trader, and so began the evolution of Volume Spread Analysis. Together with an experienced computer programmer Tom carefully studied many thousands of charts to recognize the obvious patterns that were left when professional or smart money was active. This methodology although simple in concept took many years to write and is now taught as a methodology combined with the software called TradeGuider.

Volume Spread Analysis seeks to establish the cause of price movements. The 'cause' is quite simply the imbalance between Supply and Demand or strength and weakness in any liquid market, which is created by the activity of professional operators or "Smart Money." If you use the TradeGuider software you will see that it does an excellent job of detecting these key imbalances for you, taking the hard work out of reading the markets and enabling you to fully concentrate on your trading.

The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of technical analysis. To use a chart without volume is similar to buying an automobile without a gasoline tank.

For the correct analysis of volume, one needs to realize the recorded volume information contains only half of the meaning required to arrive at a correct analysis. The other half of the meaning is found in the price spread. Volume always indicates the amount of activity going on, the corresponding price spread shows the price movement on that volume. Many traders believe you cannot analyze volume in the FOREX markets because it is unavailable, but we will show you how TradeGuider proprietary system can achieve something that most traders thought was not possible. More about this later.

Some technical indicators attempt to combine volume and price movements together. Rest assured this approach has limitations, because at times the market will go up on high volume, but can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume! So, there are obviously other factors at work.

Price and volume are intimately linked, and the interrelationship is a complex one, which is the reason TradeGuider "Smart Money" Tracker was developed in the first place. The system is capable of analyzing the markets in real-time (or at the end of the day), and displaying any one of 280 indicators on the screen to show imbalances of supply and demand.

Let's go ahead and look at some charts.

The TradeGuider "Smart Money" Tracker Indicators.

All of the indicators can be grouped into two broad categories: Indicators that show weakness are colored red. Weakness is indicative of supply, professionals selling the market, or professionals withdrawing from the market (i.e. no participation). Strength is indicated by green symbols and is indicative of market demand (i.e. professionals buying into the market or not selling as the market falls).

TradeGuider constantly analyzes your charts for imbalances of supply and demand or strength and weakness as it happens. Once an imbalance is found, a red or green indicator is displayed, alerting you to the likely strength or weakness in the market. This chart (link below) shows a number of green symbols, indicating strength (demand). Showing supply and demand graphically on a chart is one of TradeGuider's major strengths. In the chart below, we can see that following the cumulative effect of a build up of demand, the stock responds with a positive and sustained price rise.

This chart (link below) shows a number of red symbols in a strong short and medium term downtrend, confirmed by the bearish volume thermometer, indicating weakness (supply). The market falls because of the lack of interest from professionals as the price rises. We call this "No Demand." In a downtrend this is a great shorting opportunity. Here is an example of a TradeGuider chart in MetaStock 12.


Chart 1




Because TradeGuider works in FOREX, Stocks, Futures and Commodities, the actual markets we analyze for this document are irrelevant.

Now let's look at some specific Volume Spread Analysis indications of demand. (strength) Climactic Action, is another indicator variant that shows when buying is overcoming selling. A high volume down move, on a wide spread would normally indicate selling. However, if the next bar closes higher, closing on or near the top of the bar, then this shows that buying occurred on the previous bar. Only professional money can do this and it is therefore a good indication of strength.


Chart 2



Notice on this chart the ultra high volume activity on a down bar with the price close in the middle of the bar. This can only mean professionals are buying the market otherwise the close would have been at, or near, its low. The concept of climactic action, as with most VSA indicators, has different variations. By using the TradeGuider "Smart Money" tracker you will be alerted automatically to all variations as they appear, accelerating your learning curve. The next chart we'll look at will demonstrate what a test looks like. Tests, by their very name, are the professionals testing the amount of supply present in the market. When they test and there is low volume this clearly shows no residual supply and the market is likely to rise in the near future.

Now for an explanation of how TradeGuider can analyze FOREX charts to determine strength and weakness in both spot FOREX and Currency Futures.

It is important to understand that TradeGuider does not need actual volume but relative volume compared to the previous bar to give a VSA indicator. Volume in FOREX can be seen as activity, and it is this activity that TradeGuider picks up extremely well when using MetaStock.

Here is an explanation from Tom Williams, the creator of TradeGuider.

Q: How does the Tradeguider VSA principles work in Spot FOREX?

A: First of all you have to realize that the "Smart Money," or "Professional Money" is very active in the FOREX market. "Professional Money" as we shall refer to it here, can be trading syndicates, individual traders with huge capital, large financial institutions, certain funds such as 'The Quantum Fund operated by George Soros, and large institutional banks.

See further information in this letter from The Derivatives Study Center sent to The Commodity Futures Trading Commission in August 2000 by clicking here.

These individuals or organizations are very secretive in their dealings, as it is crucially important to keep their actions as invisible as possible.

Fortunately tick volume does work. Tick volume is added to the price movement on every price tick up or down, because one may deal in 5M while the very next trader only deals 500k, but we get one tick each dealer. Bear in mind the number one principle, that from the tick volume created, 90% will be from "Professional Money" and their dealers.

When these very large orders go through, they have a following, the same as the futures pits; this automatically creates more ticks, hence higher volume. So TradeGuider will analyze the tick volume as if it were real volume, and will clearly show this "Professional Money" either participating or just as importantly not participating in the movement of a currency. When we hear of strength and weakness in a currency, this is nothing more than professional support or lack of it, and can be clearly seen on the TradeGuider Chart.

Remember when in 1992 George Soros massively shorted the British Pound forcing the Bank Of England to eventually withdraw from the European Exchange Rate Mechanism, well, this is one very well known example of "Professional Money" having a dramatic effect on a currency. This happens every day, you just need to know what to look for. Check out this chart and see what the volume did in that famous move by George Soros:

Here's a famous example...


British Government no match for George Soros

In 1992 the British pound fell so sharply that Britain was forced to leave the Exchange Rate Mechanism (ERM). What do you think was behind this famous fall? Yes, you guessed it, professional money! The money in question was the Quantum Fund, run by the renowned speculator George Soros.

He and his analysts had spotted a potential weakness in the ERM. During the weeks before the massive sell-off of the British pound, George Soros was busy exchanging seven billion US dollars for German Deutschemarks.

When the time was right he moved in fast, selling the British pound. As the pound fell the Deutschemark rose, creating huge profits for Soros. As soon as the news broke the other professionals followed suit. The onslaught was overwhelming and too much for Norman Lamont, the then UK Chancellor of the Exchequer.

In an attempt to halt the slide Lamont resorted to selling some of Britain's gold reserves, he put up interest rates three times during one day, but this was still no match for the professionals.

The following is taken from the first 19 pages of the highly acclaimed book by Tom Williams – "Master the Markets." Here is some more information about this book. It WILL change the way you view the markets, so please take a moment to view these first few pages. The complete book has over 185 pages and the MetaStock "Smart Money" tracker software comes with a multimedia home study course that brings the book and plug in to life.

ALL MARKETS ARE DOMINATED BY THE BIG PROFESSIONAL PLAYERS

The banks, institutions and the specialists have all the financial resources to move prices up or down. Trillions of dollars are exchanged daily across the world's stock, currency and commodity markets. Hundreds of millions are spent analysing crop reports, business sectors and economic figures.

All other activity, including the combined trades of thousands of individuals like you and me, represents only a tiny fraction of the money and resources flowing in and out of the market on a daily basis.

You may think that's pretty obvious. But...

Markets don't react to professional activity the way you expect them to.

In every market, there's an undeclared understanding amongst professional traders. It alerts them to what the big money is doing. It's based around observations surrounding volume activity and the effect this has on the price and the spread.

To us outside observers this activity normally goes unnoticed - an insignificant and unexplainable blip lost amongst the 'noise' of the markets.

If you've ever watched the Dow or a stock price over any period of time, you'll know that prices can fluctuate wildly. But there is logic behind all this chaos and the professionals know exactly how to profit from it.

They know what the signals mean, yet only a tiny minority of non-professionals know what's really going on.

By using the MetaStock "Smart Money" tracker, you could be one of the trading elite...

As you'll see in graphic detail later, knowing how to read the market will allow you to take the professional's lead and boost your profits.

Understanding professional moves will allow you to uncover the true market sentiment. It will give you a clear indication of which markets you should hold positions in - whether buying or selling stocks, or going long or short on futures.

There's No Way To Hide...

You see, no matter what they do, the professionals can never hide their true intentions. They may be leading the market, but they leave tell-tale signs for anyone with the right knowledge to follow.

It doesn't take a great leap of logic to see how you could use this information to your advantage...

Ultimately it means that all other factors - including the fundamentals of a company, the management, the strength of the dollar and interest rates, simply aren't important in your analysis. Ditto for newspaper financial columns, investment journals, broker recommendations and television coverage.

The only truly important consideration for you is what the professional money is doing - that is the only thing that matters.


*** To see recent MetaStock chart examples of the specific market you trade and receive The Complete Volume Spread Analysis System Explained ebook at no cost just email ken@tradeguider.com and provide a contact number and we will be happy to assist you and answer any questions you may have.

About Gavin Holmes

Gavin has helped thousands of traders in over 36 countries learn how to track the "Smart Money" and avoid the tricks the "Smart Money" play. Gavin was taught to trade by veteran syndicate trader, Tom Williams, (now 78), and was fortunate enough never to have picked up the bad habits many retail traders suffer from.

Gavin is now based in Chicago in the US and regularly hosts seminars and events sharing his experience and knowledge developed through talking to hundreds of retail traders each month, most who are finding the markets a challenging environment..


Support Tip: MetaStock Monitor NOVEMBER-DECEMBER 12

Support Tip

How do I access the Power Console?
Contributed by MetaStock Support

The Power Console takes everything that is great about MetaStock and puts it in one convenient location. Now you can open a chart, start a scan, run a test, review reports, make custom lists, and more...from one full-featured dashboard. You can access the Power Console when you open MetaStock (Example 1) or navigate to it (Example 2). Here's how:

To access the Power Console when opening MetaStock:

1) First, open MetaStock. The Power Console will automatically appear.


To navigate to the Power Console in MetaStock:

1) When you are in MetaStock, look in the upper left hand corner for the box with a "P" in it. Click on the boxed "P".


2) After clicking on the boxed "P", the Power Console should appear.


You can also select "Open Power Console" from the Menu.

Tuesday, November 20, 2012

Take Advantage of Volatility


MetaStock SPRS Series - Week 95 - TechniTrader® Stock Discussion for MetaStock Users - Take Advantage of Volatility - November 19, 2012
By: Martha Stokes C.M.T.

Many traders complain about volatile markets. They see volatility as a problem, something that thwarts their trading and frustrates them as they try to short term trade. In their trades they encounter whipsaws, bounces, and reversals that cost them profits or worse, chronic small losses.

Many Options traders use implied volatility, or what I call compression patterns as a means of anticipating breakouts and sudden moves up or down.

Most of the time traders view volatility as a bad thing, something to endure and wait to end.

But instead of viewing volatility as something negative, you need to understand the why, how, when, and where of volatility. If you understand it, you will find that volatility is actually a powerful analytical tool that you can use to improve your trading, understand the balance of power between small lots and large lots, AND use it to enter stocks sooner with more confidence.

The WHY of Volatility:

Why does volatility occur? Is it just High Frequency Traders HFTs making a lot of fast runs? Is it Dark Pools creating problems for retail traders by trading over the counter off the exchanges? Is it caused by news and events? Or is it just some mysterious event that happens and no one can explain?

None of the above are correct.

Volatility is caused by very specific trade activity. It is not random, or chaotic, although it appears that way when you are in a trade or when you are looking at charts. It is actually a powerful, dynamic signal of a major change going on beneath the surface of the news, hype, media frenzy, crowd mentality, and trading room chatter.

To understand volatility and why it occurs, we are going to use an analogy most of you are familiar with, and have experienced some time in your life.

The ocean is full of currents, rivers, canyons, and riffs. It is also controlled by the moon’s gravitational pull, which all of you know creates the tides. There are counter movements, such as under ocean rivers, the ocean continental convergence, Arctic circumpolar currents and surface currents.

Tidal changes can be minor to severe. Extreme low tides are usually followed by extreme high tides. How close the moon is to the earth also factors in. So we have two factors affecting the waves that come to shore on the beaches you walk on:

1. Underlying energy caused by the structure of the ocean itself.
2. The moon’s gravitational pull, or outside influence that changes the tides.

The same is true of the markets.

There are structural aspects of the markets that cause under currents, rip tides, eddies, and shifts to waves like in the ocean. These deep market structural currents and movement are far below the surface of what retail traders and retail news sees and understands.

These deep structural market currents affect the overall market in ways that are not visible most of the time. These are mostly the giant lot institutions, hedge funds, and other buy side or sell side market participants.

Then we have the waves that occur in the stock market due to the smaller lots, smaller funds, and HFTs. These groups create the gravitational pull of the markets, creating speculative runs up and down due to highly emotional trading OR due to huge volume flow on the millisecond.

It is when these two levels of the market collide that we encounter volatility.

I will continue this discussion next week.

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.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, November 12, 2012

Part 1 "Dark Pools"

MetaStock SPRS Series - Week 94 - TechniTrader® Stock Discussion for MetaStock Users - Part 1 "Dark Pools" - November 12, 2012
By: Martha Stokes C.M.T.


Last week we discussed the High Frequency Trading Companies. This week we will examine their counterpart, the “Dark Pools.” These giant share lot orders have always been a part of the market. It used to be that these large lot orders were shown mostly on the market maker limit books, held back from the general exchange activity until price was at their preferred level.



Dark Pools are also called “icebergs” because most of these huge lot orders have moved off of the exchanges. There are about 20 Dark Pool systems that provide the service of order processing for the Dark Pools.

Who are the Dark Pools?

These are the largest of the Mutual Funds and Pension funds. Their typical order size is 100,000 – 500,000 and their intent is to purchase millions of shares of stock over a lengthy period of time. These are not HFTs, or day traders, or intraday professionals. Dark Pools represent the long term institutional investor who uses fundamentals, quantitative analysis, and portfolio management to choose the stocks and the quantity of shares they intend to hold for the long term.

Some purchases are for Charter requirements, others are discretionary to fulfill a specific requirement of the portfolio they are managing. They have hundreds of billions of other people’s money to invest on their behalf.

These giant trades used to be seen on a retail traders day trading platform but not any longer. These huge trades now are done totally off the exchanges.

Why did the Dark Pools move to over the counter transactions? Is it legal? Is it fair for retail traders?

It is legal. The laws of the US only require that every transaction be recorded, documented, with transfer of title, and that this all be sent through the National Clearing House by the end of the trading day. This insures that every transaction where stock is bought or sold is recorded with price, time, and quantity of the trading entities and the close of the transaction. Like all over the counter transactions, not using an exchange has some drawbacks and some benefits.

Nowhere in the law is it required to do a transaction via an exchange. The exchanges only make it easier for buyers and sellers to come together. HFTs of course are not happy about these off the exchange transactions because they want to move price up ahead of the Dark Pools giant orders.

The Dark Pools represent the largest sum of money in the US, pension plans and mutual fund investors. It is imperative that these huge funds are able to buy stock or sell stock at the price level they deem the best for their fund holders. When an HFT drives price upward or downward as a Dark Pool is trying to buy or sell, this hurts pension holders and mutual fund investors because the Dark Pool is forced to buy or sell the stock out of the range the manager determined was an ideal entry.

This is why Dark Pools have become more and more popular with the largest funds investing in the US markets. These funds represent about 8-9% of the total trading and volume in the markets, both on the exchanges and over the counter.

HFTs create far more volume activity but are limited in scope in terms of longer term price movement.

Dark Pools are here to stay. They are not harmful to retail traders, however day and intraday retail traders need to be aware that not all of the volume and activity is now visible to them. So this is the second disadvantage to trying to day trade in the electronic marketplace. HFTs are able to trade on the millisecond, creating advancing prices that can hurt retail sales.

Dark Pools DO NOT move price or volume as the HFTs do.

Dark Pools however DO show up on end of day charts, IF you are using a VOLUME based accumulating/distribution indicator that can expose what side of the trade the giant Dark Pools are on.

The chart below is an example of Dark Pool activity as a stock bottoms and moves sideways in a platform pattern. Eventually HFTS and other professionals will discover the iceberg beneath the exchanges and rush to drive price upward.

Therefore, entering with the Dark Pools is something all retail traders must learn to do. Using price and time indicators is no longer enough. These indicators are not designed to expose Dark Pool activity which does not move price. Since Dark Pools do not move price, alternative hybrid indicators that do expose Dark Pool quiet accumulation must be used.


Chart 1

We will continue this discussion next week.

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.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.

Monday, November 5, 2012

High Frequency Trading

MetaStock SPRS Series - Week 93 - TechniTrader® Stock Discussion for MetaStock Users - High Frequency Trading - November 5, 2012
By: Martha Stokes C.M.T.


HFT or High Frequency Trading has become a hot topic of late in retail news. It is important that retail traders understand exactly what a HFT is and what it is not, as well as how the HFT trading affects price so that you can be ready for the impact the HFT trading has on stock prices.

HFTs are a computer program. This computer program is based upon a formula that is designed by a Quantitative Analyst who is not only a high level programmer but also understands the financial markets. The goal of these automated computer generated orders is to move price, so that the faster trading can take advantage of the speculative action that follows.

HFTs trade on the millisecond. However Retail Traders are only permitted by SEC rules and regulations to trade on the minute timeframe. Your order by law must be filled within 90 seconds of receipt by the exchange. Many times your orders will be filled by your broker out of their own inventory, which is legal but can lead to poor fills due to slippage.

The HFTs trade on the millisecond. What that means is they trade 1,000 times per second or 60,000 times a minute which is your timeframe. If your order is executed within 90 seconds, the HFTs could have traded 90,000 times in that timeframe.

HFTs therefore have a decided advantage in terms of you trading against them. What you need to learn is how to trade WITH HFTs, getting in just before they move up price suddenly with long high point gain candles and huge surges of volume.


Chart 1

The IBM chart above has had several HFT big gains, with high volume days in the past few months. This is a big name company and HFT Quantitative Analysts know that cluster orders can be found wherever large numbers of smaller lots are buying or selling. By instigating either buying or selling prior to market open HFTs gain control of price for that day.

Usually smaller funds, retail traders, and small lot investors chase the HFT action which is highly profitable for the HFTs but often a losing trade for retail traders.

Identifying HFT patterns on a chart is the first step to understanding how to exploit their activities. When you can learn to enter before a HFT trigger order run, then you will be able to ride that run up for the day and take good profits.

Since liquidity is very high on this huge volume days, exiting is simple.

What you do not want to do is chase the HFT run up, because you will encounter whipsaws and losses due to their lightening fast trades that you are unable to see even if you are using a retail day trading platform.

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.

Disclaimer: All statements, whether expressed verbally or in writing are the opinions of TechniTrader, its instructors and or employees, and are not to be construed as anything more than an opinion. Student/subscribers are responsible for making their own choices and decisions regarding all purchases or sales of stocks or issues. At no time is any stock or issue on any list written or sent to a student/subscriber by TechniTrader and its employees to be construed as a recommendation to buy or sell any stock or issue. TechniTrader is not a broker or an investment advisor it is strictly an educational service.