Which Market Participant Group is in Control of Price?
This is a training
lesson to show what many of you are missing in reading a stock chart. Usually
Retail Traders are all about trading a big name stock that shows up on
recommendation lists, guru’s picks, or social media sites. However these
methods of finding stocks immediately increase your risk of High Frequency
Trading Firms HFTs front running, Retail Broker spread exploitation, and
Professional Trader profit taking.
The chart example of
AAPL was chosen randomly, but also because it frequently is in a list of stocks
being discussed.
This test of your
skills to choose a stock to trade was not about an entry at a specific time but
an analysis of the Risk factors, Trend, Candlestick Patterns that commonly
form, Trading Style most suitable for the Trendline Patterns occurring, and
identifying the Market Participant Groups who are actively trading any
particular stock.
Below is a weekly
chart view.
Analysis Part 1
Understanding WHO
controls Price at what point in the Trend, and WHY they control price. It is
learning why a specific Market Participant Group creates different Candlestick
Patterns, Runs, Resistance or Support, and individual Candlesticks.
Question:
Which Market
Participant Group is in control of price right now?
Answer:
1. High Frequency
Trading Firms HFTs that use automated algorithms to search for Retail
Cluster Orders are very prevalent in this stock. HFTs frequently gap the stock
up or down by filling the queues ahead of market open with their orders to buy
or to sell. The HFTs are typically active in the first minute or two minutes of
the day and then are gone. This is seen on the AAPL chart with the huge surges
in Volume, as well as other Volume and Quantity Indicators.
2. Professional
Floor and Independent Professional Traders are also active in AAPL, but their
strategy is End Of Day EOD to First of Day FOD and are not filling the queues
ahead of market open. Their activity is harder to see on the daily chart view
but easily seen in an Intraday one minute chart.
3. Dark Pools
which are the Buy Side Institutions are not accumulating the stock at this
time, and instead have been in Rotation mode for more than a year. They are
selling into the buying of the Retail Traders and HFTs. This is seen by Volume
and Price runs at the End Of Day and First Of Day. This Dark Pool Quiet
Rotation™ weighs on the stock at the trading range highs, but does not create
strong runs down.
4. Independent
Investors is a tiny group nowadays, but they continue to buy this stock
emotionally as it runs up. Lacking any training and relying upon their presumed
“entitlement” they often buy as the stock enters a Professional Trader profit
taking mode. This is seen at the peaks in the daily chart view.
5. Retail Traders
are a very active group which trades this stock as it is a big bellwhether, and
has plenty of intraday Volume for their small lots. Their Candlestick Patterns
are smaller candlesticks and overlapping candlesticks due to their chronic use
of “Limit Orders.” They are often buying into AAPL after the run is underway
for a day or two, which consequently lowers their profit potential.
6. Corporate
Buybacks are occurring as this company has been buying back shares of its
own stock. Corporate Buybacks inflate prices and are typically set up to
trigger at new lows, all time lows, and quarterly or monthly lows. A
corporation WANTS price to move up and is shrinking supply to deflect demand,
in such a manner that Price rises. This also triggers High Frequency Trading
HFT action. The Candlestick Pattern of Corporate Buybacks are longer
candlesticks to the upside, as they pull supply from the Stock Market.
Go
to the TechniTrader
Summary
This is just one area
of analysis that needs to be done before choosing a particular stock to trade.
This is especially true if you are trading only a few stocks over and over
again. By understanding WHO controls price, WHERE they control price, and WHY
they can control price you have a strong analysis of how price will move next.
When you understand
how price is likely to move next based on which Market Participant Group was
dominant at that time you can plan Entries and Exits, choose what Trading Style
to use based on which group it is, and determine the Risk involved when trading
with that group.
Reading a stock chart
for trading is totally different than learning Technical Analysis, Candlestick
Patterns, or Indicators. Those are all part of the pieces of stock analysis,
but are insufficient for strong consistent profitability every time you trade.
Complete stock chart analysis must quickly encompass much more. Once you learn
to read the footprints of the different Market Participant Groups, analysis is
far faster and far more reliable than just a technical pattern by itself.
Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a StockCharts chart, courtesy of StockCharts.com
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDs with every course.
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