How to Use Large Lot Versus Small Lot Indicators
by Martha Stokes CMT
Indicators that Reveal Large Lot Rotation Divergence from Price
With institutions accounting for 80% of all the market activity nowadays it is imperative to have indicators that expose large lot distribution or rotation patterns even while price moves up. Often times the Dark Pools are quietly selling in the background while smaller lot investors, retail traders, and smaller funds are buying a stock, temporarily pushing it upward.
Divergences between uptrending stocks on lower volume while Dark Pool large lot orders are firing on the sell side, warn of the increased risk of a sudden downward price action. JNJ has a pattern of recent giant fund rotation.
Rotation is the lowering of shares held for Charters for the long term. The giant funds are not selling out of the stock, but lowering their held shares to avoid having too many shares held in the portfolio as the company encounters slower quarters of revenue and earnings growth. Rotation is not the same as distribution. Distribution is significantly more critical and can often cause a topping formation.
Rotation is common at the end of quarters and is especially visible during August. Rotation increases the risk of HFT interference as the algorithm discovers the slow consistent selling pattern footprint of the Dark Pool giants. JNJ show such a rotation pattern. As price moves up, driven by at market orders from smaller lots who do not know much about buying stocks and are buying on the dip, the large lots are selling as the stock moves up. This increases the risk of a sudden HFT run or gap down one day event. Points run down by an HFT can be huge.
If HTFs trigger on that steady selling pattern even though the stock moved up recently, the risk of a huge downside run increases. Therefore it is important for swing, day, and other trading styles to recognize that the run up is due to smaller lot buyers and that large lots are quietly selling behind the scenes.
The stock may move up further, but often times, the sudden reversal catches retail traders by surprise which can cause a loss for that trade. Avoiding stocks with heavy large lot selling while the smaller lots run price upward, can reduce risk of losing trades, and help in choosing which stocks to trade.
By selecting stocks that have quiet accumulation patterns or steady Dark Pool large lot buying, the retail trade increases their potential profits and lowers risk. Retail traders will find that when they employ these indicators, their losing trades, whipsaw trades percentages drop.
One of the critical things retail traders must learn to do is to avoid losses in their trading. A beginning retail trader should strive for a 75% success rate in their trades. That means 7-8 trades are highly profitable while 2-3 are small losses.
Many retail traders have dismal success rates ranging from 30-50% which means that most of their trades are losses. This consumes capital reserves and erodes confidence.
By using indicators that tell you what side of the transaction is large lot versus small lot, traders can and do increase their profitability per trade ratios.
Trade Wisely,
Martha Stokes CMT
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor & Developer of TechniTrader Stock Market Courses
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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.
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