Monday, June 17, 2013

Using HFT Volume Patterns as a Contrarian Exit

MetaStock SPRS Series - Week 123 - TechniTrader® Stock Discussion for MetaStock Users - Using HFT Volume Patterns as a Contrarian Exit - June 17, 2013
By: Martha Stokes C.M.T.

High Frequency Traders create huge volume spikes on charts that are the most easily identified volume pattern in today’s automated market. These massive surges in volume create a distinct pattern that can be recognized instantly for quick stock pick selection.

The professional trick is that certain HFTs volumes indicate continuation patterns while other HFT volumes indicate a reversal is imminent. Determining which has occurred tells you how to trade the stock at that time.

One of the most common patterns that forms in an uptrend is the double HFT volume spike. Often times the price doesn’t move hugely as it would out of a bottom or during a momentum gap, but remains almost flat. This is a signal that the stock is under heavy large lot selling or distribution patterns as price moves up. When HFT volumes are unable to move price this is usually a warning that the stock will not sustain upside action but will shift either into a sideways pattern, or start to form a top. This stock moved sideways after the double HFT volume spikes, unable to gain ground as more and more giant funds quietly moved out of the stock while smaller funds were buying after the HFTs.

A key element of understanding HFT volume spikes, is knowing who trades with HFTs and who trades after HFTs.

This technique works for Swing, Position, and other short term trading styles.

You can see that volume has dropped off significantly after the HFT double volume spike than prior to that spike. This means that quiet accumulation was going on prior to HFT orders triggering. Once the HFTs discovered the quiet accumulation the HFT automated orders triggered two days in a row creating huge volume but now appreciable price variance, gain or loss. The volumes drop way below as smaller funds with smaller sized lots rush in.

What we have is the battle between the Dark Pools and HFTs. Dark Pools are able to hide their pre-trade order interest in a stock, thereby hiding from the HFT as they accumulate. However, when HFTs discover the accumulation later on, their orders trigger. Smaller funds trade similarly to retail traders and follow HFT action, because they are not as informed about the relationships between Dark Pools, HFTs, smaller funds, retail traders, and price and volume patterns.

Using HFT volume spikes, especially the double volume spikes as contrarian or exit patterns allows you to plan your trading well in advance of price reversals on uptrends, and bounces on downtrends. It also helps you avoid buying into a stock that is shifting sideways, creating the risk of small losses for Swing and 
Momentum traders.

Trade wisely, 

Martha Stokes, C.M.T.
For more information email:
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
©2013 Decisions Unlimited, Inc.

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