Friday, April 11, 2014

TechniTrader Weekly Stock Discussion for MetaStock “5 Tips to Avoid Front Running by High Frequency Traders HFTs”

MetaStock® SPRS Series - Week 166 – April 11, 2014 - MetaStock Spatial Pattern Recognition Skills Series written by Martha Stokes CMT

The new Flash Boys book has captured the imagination of everyone who invests or trades in the stock market. The fear that the market is “rigged” is everywhere.  The CEO of IEX is of course hoping his new exchange will benefit from all the news media hype and panic.
However, most investors and retail traders do not need to worry.  If your investments for your long term portfolio are with a large to giant mutual fund or pension fund, then these funds are using Dark Pools which are off the exchange transaction the HFTs can’t see and front run.
If you are a retail trader, remember that most of the orders placed with online brokers for retail traders are filled from that online broker inventory. So your orders never make it to the exchanges. If you are using an Electronic Communication Network ECN, most of those orders are not sent to the exchanges either.
Here are 5 Tips to Avoid Front Running by HFTs:
  1. Study your stock charts using volume large lot accumulation/distribution indicators.  These are uptick/downtick based indicators that track the larger lot meaning 50,000 – 500,000 shares, against the smaller lots which are usually 100 shares to as high as 5000 shares. Entering with the giant buying keeps you out of the HFT order flow, because the Dark Pool orders are hidden from HFTs.
  2. Remember that any order 10,000 shares and above is considered a “Large Lot” order and these tend to be sent more often to exchanges if inventories for your online broker are too low.
  3. If you are a day trader, you must accept that HFT activity is going to interfere with your trading. There is just no way of getting around it intraday. HFTs trade 1000-3000 times per second, YOU can only trade on the minute scale by law and by circumstance. Most retail traders could not afford a million dollar HFT trading setup of hardware and software.
  4. Do not use “At Market Orders.” An At Market order tells your broker to fill the order at the market price.  This can set up an opportunity for slippage and wider spreads which will give you a higher cost entry. In addition, At Market Orders send a message to the online broker and market in general that you are not an educated, experienced investor or trader.  At Market Orders are rarely used by experts and professionals. There are only rare specific purposes for such orders.
  5. Do not use a simple “Limit Order.”  Limit orders are the most common reason why retail traders, especially day and swing traders have constant losses.  Professionals stopped using Limit Orders years ago and have switched to more complex, multi-tiered controlled bracketed orders. You need to learn these new types of orders if you plan to swing or day trade so that you can avoid getting swept into an HFT downdraft or huge gap.

The charts below show HFT activity.  Huge HFT activity is usually a one day event in a stock based on news, arbitrage from another market or instrument, hedging, retail cluster orders caused by retail traders all using the same trading systems, strategies, MACD or Stochastic indicators, and some technical set ups.  One of the huge advantages you as a retail trader using technical analysis and stock charts is that you can see the activity of the HFT, Dark Pool, Smaller Fund, Corporate Buybacks, and many more patterns that tell you who is controlling price and thus how price will behave thereafter.
One final tip is that HFTs rarely shift the trend, so do not start selling short right after a huge HFT down day. C:\Users\Adrienne\Desktop\TechniTrader HFT Example.jpg
Above chart shows two HFT high volume and long candles.  The first attempted to drive price up but the stock did not alter its trend. The second tried to drive price down, but the bottom buy zone for Dark Pools had already been reached. The stock then commences a sideways action of an early bottoming pattern.C:\Users\Adrienne\Desktop\TechniTrader HFT #2 example.jpg
Chart above shows HFTs attempting to drive price up but the price quickly shifts sideways and then turns down again. HFT action did not reverse the down trend in the month of February.
Do not chase HFT activity, instead learn to enter before the HFT moves price. Learn how to interpret the stock and volume action to know when quiet accumulation is occurring, so you can buy into the stock before the big moves of the HFTs.
For information on Candlestick Patterns CLICK HERE
Trade wisely,
Martha Stokes CMT
Chartered Market Technician
Member of Market Technicians Association
Master Rated Technical Analyst for Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader Stock Market Courses
For additional training visit
This Stock Discussion and Training Lesson is sponsored by
MetaStock® Partner

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