Candlestick Stock Charts Reveal HFTs & Dark Pools
Most individual investors and retail traders do not need to worry about High Frequency Trader front running. If investments for your long term portfolio are with a large to giant Mutual or Pension Fund, these funds are using Dark Pools which are off the exchange transactions. The HFTs can’t see them to 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 broker’s inventory. So those orders never make it to the exchanges. If you are using Electronic Communication Networks ECNs, most of those orders are not sent to the exchanges either.
Otherwise here are 5 Tips to Avoid HFT Front Running:
- Study candlestick charts using Volume large lot accumulation/distribution indicators. These are uptick/downtick based indicators that track the larger to giant lots of 50,000 – 500,000 shares, against the smaller lots which are usually 100 – 5000 shares. Entering with the large to giant lots buying keeps you out of the HFT order flow, because Dark Pool orders are hidden from HFTs.
- An order of 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.
- 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 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 or experienced investor or trader. At Market Orders are rarely used by experts and professionals, and with only specific purposes for such orders.
- 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. Learn these new types of orders for Day or Swing trading to avoid getting swept into an HFT downdraft or huge gap.
- 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, while YOU can only trade on the minute scale by law and circumstance. Most retail traders could not afford a million dollar HFT trading setup of software and hardware.
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, and hedging. It is also caused by Cluster Orders from retail traders all using the same trading systems, strategies, MACD or Stochastic indicators, and some technical set ups.
One of the huge advantages a retail trader has using Technical Analysis and candlestick stock charts is the ability to see the activity of the HFTs, Dark Pools, Smaller Funds, Corporate Buybacks and many more patterns that reveal 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.
Chart example #1
The chart example above shows two HFT high Volume spikes with long candlesticks. 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 commenced a sideways action of an early bottoming pattern.
Chart example #2The second chart example shows HFTs attempting to drive price up as indicated by the green arrow, but the price quickly shifts sideways and then turns down again. HFT action did not reverse the down trend that month.
Do not chase HFT activity, instead learn to enter before HFTs move price. Learn how to interpret candlestick stock charts and Volume action to know when quiet accumulation is occurring, so you can buy into the stock before big HFTs moves.
The individual investor does not have the same access to information as the Mutual and Pension Fund Institutional Investors of the market who control 80% of the market’s activity, so the ability to read stock charts to uncover professional interest in a stock is key to successful investing.
I invite you to visit my website at www.technitrader.com
Martha Stokes CMT
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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