List of How to Identify High Frequency Trader Activity
High Frequency Trader activity occurs often these days, and the High Frequency Trader Impact on Selling Short is substantial but unsustainable. Retail Traders who want to learn how to Sell Short during topping markets and downtrends, need to be able to identify the “footprints” of the Professional Trader and Technical Trader versus the High Frequency Trading patterns. These Market Participant Groups leave a different footprint on the stock chart which enables the Retail Trader to distinguish between them, and thus be able to determine what price will do next.
Technical Traders are Semi-Professional Retail Traders who have a proper education, trading process, and are able to trade larger lots successfully. Professional Traders and Technical Traders earn high incomes trading stocks and are technically oriented in their trading. Therefore, their runs are based on the principles of modern Technical Analysis using large lot indicators versus small lot indicators as well as other leading indicators. In addition, they use Western Candlesticks™ for precise entries instead of candlestick reversal or continuation patterns, or indicator crossover signals which are less reliable.
Below is stock chart example #1 with the footprints of the Professional Traders and Technical Traders, as well as the High Frequency Traders outlined on the chart.
Professional Traders and Technical Traders follow the giant Buy Side Institutions using Dark Pools, getting in as soon as they recognize the Dark Pool footprint. This gives them a huge advantage because then they buy in ahead of the High Frequency Traders who chase the Dark Pools.
1. Gaps Down
Big and huge gaps down are the results of the High Frequency Trader Impact on Selling Short, and this chart example shows that Professional Traders and Technical Traders are Selling Short ahead of High Frequency Traders. The High Frequency Traders as well as Professional Traders and Technical Traders, Buy to Cover on that gap down day and shortly thereafter.
Smaller Funds who tend to use Volume Weighted Average Price orders enter late into the stock, thereby chasing High Frequency Traders or Professional Traders. Entering the stock late is also true of Retail Traders using “trading systems,” outdated “trading strategies,” or “crossover indicator entries.” Entering late means that Retail Traders and Smaller Funds are often buying or selling against the large lot Professional Traders and Technical Traders, and this is a primary cause of whipsaw trades for them.
2. Huge One Day Runs
The High Frequency Trader Impact on Selling Short includes huge one day runs down as seen in stock chart example #1. These huge one day runs are unsustainable.
3. Volume Spikes
Another signal of the High Frequency Trader footprint which is very obvious on stock charts due to the High Frequency Trader Impact on Selling Short are the Volume Spikes occurring on the days of the gaps and huge one day runs down. One rule Retail Traders must adhere to is NEVER truncate Volume. In order to identify each different Market Participant Group, Volume needs to be seen as it occurs naturally. Truncating Volume should never be done as you will not be able to identify High Frequency Traders easily with their huge Volume spikes.
Below is stock chart example #2 showing a one day Gap Down with a huge Volume spike, which is a footprint result of the High Frequency Trader Impact on Selling Short.
Smaller Funds chasing the High Frequency Trader gap down and entering late selling to the downside, are shown inside the red box drawn around price. They are selling unaware that price is now in a Dark Pool Buy Zone™ as can be seen by the tight candlestick sideways price range beginning outside the red box, and this is where the Bottom will form for this stock. The Dark Pool Buy Zone is confirmed by the indicator Balance of Power in the bottom chart window.
Martha Stokes CMT
TechniTrader technical analysis using TC2000 charts, courtesy of Worden Bros.
Chartered Market Technician
Instructor & Developer of TechniTrader Stock & Option Courses
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