High Frequency Traders create most of the "Volume Spikes" that form on your charts nowadays. This is due to their high speed, low latency trading platforms that execute as many as 3000 trades per second. This is way beyond the scope of retail trader's minute trading platforms.
HFTs can control price for one day, and sometimes for 2 days. Their volume patterns are easy to identify on the charts and can give you a leading indication of what to expect the next day.
If you are a swing trader, learning these patterns is crucial for your success. If you do not understand whether the HFT volume is a continuation or a reversal pattern, and why it is a continuation or reversal pattern then you are most likely to find yourself on the wrong side of the trade most of the time.
Studying the chart above with colored volume to indicate an upside price day versus a downside price day, it is easy to pick out the HFT volume days when the HFT trigger orders are moving price and volume.
Remember that not every HFT buy or sell is profitable for them. This is a computer generated high frequency order system. The computer is far from infallible.
The first HFT action is out of a bottom. Smaller funds and retail traders who use share lots above 5000-10,000 lot size are trying to sell down this stock. TechniTrader® Quiet Accumulation TTQA shows this smaller fund and large lot selling effort. However Dark Pools are moving in at this level so price holds steady. HFTS discover the Dark Pools and trigger a gap up day on higher volume. As the Dark Pools shift the sentiment to the upside, seen by the red to green TTQA in December, the HFTS once again trigger causing price to move up again.
When HFTS are tracking Dark Pools the trend continues.
As the Dark Pools activity evaporates smaller funds and HFTs are driving price. Dark Pools have stopped buying. When HFTs discover this they start selling short, triggering the smaller funds and retail side to chase on the sell side, either selling out of a losing trade or trying to sell short.
However, the Dark Pools are NOT selling, distributing, or rotating. They simply stopped buying because price moved out of their buy zone. So as the price enters their buy zone, the Dark Pool orders start firing off again and this forms the bottom.
HFTs once again discover this, driving price up again for one day end of April. Since Dark Pools are still in the buy mode price moves up slightly in May. HFTs try to drive price up further but fail at the end of May. So the HFTS switch tactics and try to sell short, unfortunately for the HFT computers which are not able to see what you can see in your charts, the Dark Pools are triggered just as the HFTs try selling short again based on their computer algorithms.
Smaller funds chase the HFTs and lose money, because Dark Pools are consistently buying incrementally which now drives price.
The final long volume and green TTQA is a result of HFTs triggering after the Dark Pools have completed their buying for the moment.
The dynamics between the two largest and most dominant market participants in the market is important. By understanding how they move in and out of a stock and what patterns they create on the charts, you can learn to enter before the huge HFTs moves and avoid being on the wrong side of the trade.
Trade wisely,
Martha Stokes, C.M.T.
For more information email: info@technitrader.com
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Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
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