Patterns in Candlestick Charts
Main challenges Individual Investors and Retail Traders face today, are figuring out when High Frequency Traders are going to suddenly appear and when Dark Pools are quietly buying or selling. There are distinct candlestick and indicator patterns for tracking the Large Lot Institutions that use Dark Pools, which repeat over time.
The following is the cycle of the buying pattern step by step:
1. Dark Pools are buying into a stock. Their interest in a stock is no longer seen on the market maker limit books prior to the execution of their trade because they use Alternative Trading Systems. These are giant Mutual and Pension Fund Investors buying for the long term, most of the time.
2. Professional and Floor Traders who are closer to the action of the Dark Pools, jump in for short-term trade action. Some are Intraday Traders, while others are Swing Traders.
3. High Frequency Traders discover the Dark Pools either via a notification once the Dark Pools have bought what they want which is a news alert, viewing the transactions posted after clearing, or due to a ripple in Volume. The ripple in Volume occurs when a Dark Pool order cannot be totally filled on the Alternative Trading System platform, so some of the order is filled on the exchanges.
4. Smaller Funds chase the High Frequency Traders due to news, causing price to surge with emotional responses to the High Frequency Trader action.
5. Retail Traders chase the Smaller Funds ending up getting into a stock just as a whipsaw or reversal occurs, due to sudden profit taking by the High Frequency Traders.
This pattern of buying is repeated over and over, often frustrating Retail Traders who unwittingly get in the way or buy unaware of who is controlling price at that time.
The buying patterns can be seen in the stock charts, and every Individual Investor and Retail Trader should learn them. Part of the pattern is in Price, part is in Volume, and part is in large lot versus small lot indicators.
Martha Stokes CMT
TechniTrader technical analysis using a MetaStock chart, courtesy of Innovative Market Analysis, LLC dba MetaStock
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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