Beyond the Basics of Candlestick Patterns
Quiet Accumulation is
a very precise pattern that is easily recognized, once a trader learns to look
for it. Quiet Accumulation occurs when Buy Side Institutions are slowly and
incrementally buying a stock over an extended period of time, often many months
to over a year.
Buy Side Institutions
are divided into two groups:
1. Giant Buy Side Mutual Funds such as Fidelity, Buy Side Pension Fund Management
Companies such as Frank Russell or California Teachers Retirement, Larger Buy
Side Funds such as Janus. There are a small number of fund entities that fall
under this category of large to giant sized fund.
2. Smaller Buy Side Funds which number in the tens of thousands and range in size
from one individual managing a fund worth $100,000 to funds managing under 100
million.
The Institutions that
matter most are the larger to giant funds. These institutions can hold 10-40
million shares of just one stock or more, depending on their intent.
When a major Buy Side
Institution buys stocks, it cannot just go out and buy 10 million shares all at
once, that would create such a massive liquidity draw that the price would
skyrocket. Rather, they mostly buy a stock slowly in increments over time.
Their lots are however, still huge compared to all other Market Participant
Groups. Over time their patterns begin to show up on charts and Candlestick
Patterns, that only this group creates.
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No other Market
Participant Group forms these patterns. This is due to their usage of Dark Pool
Alternative Trading venues, which give them legal right to delay orders during
the day to hide their activity. Most of the time Dark Pool orders are only
showing up 3-4 hours before the market opens in the mainstream data, or after
the consolidated ticker data is in for the day which can take more than an hour
to show up after market closes.
Most Retail Traders
have no idea what is going on behind the scenes, who is creating what technical
patterns and where they typically create those patterns. Most Retail
Traders are fixated on “strategies,” “crossover indicators,” and a few
candlestick continuation or reversal patterns.
This narrow
perspective tends to overlook the broader picture that is evident in the
charts. This is because most Retail Traders are not reading the chart; instead
they are merely looking for some pattern to trade on some sort of news.
The liquidity draw of
the Buy Side Institutions using Dark Pools is a critical aspect of Technical
Analysis not taught in most Technical Analysis books. I call it Relational
Analysis™ because in order to see the pattern you must combine the analysis of
Price, Volume, Accumulation Indicators, and Trendline Pattern to see the
footprints that are on the chart.
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When Buy Side
Institutions pull sufficient liquidity, Professional Traders can see this and
react by also buying into the stock using the accumulation as an entry. Later
High Frequency Traders will discover the liquidity draw as well, and the stock
will run up suddenly or gap up. Then the Smaller Funds will chase the High
Frequency Trader runs, as they use Volume Weighted Average Price as their
trigger.
With the exception of
some Dow components, the overall Stock Market activity has been very sideways
with tighter formations, yet the chart example stock suddenly gapped 3+ points
this morning ahead of open. See chart example below.
Summary
Prior to this gap,
the footprints of Dark Pools quietly accumulating starting in mid-summer is
evident on the chart. A compression pattern preceded the gap as Professional
Traders lined up ahead of the High Frequency Traders.
This is a stock that
TechniTrader Students have been aware of since the accumulation began. It takes
more than a strategy, an indicator, or a candlestick pattern to be consistently
successful trading stocks. Sure you can get by with hit and miss results but
ultimately the truly profitable traders, are those who learn to understand what
is going on far beyond the basics that most traders are taught.
Trade Wisely,
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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Disclaimer: All statements are the opinions of TechniTrader, its instructors and/or employees, and are not to be construed as anything more than an opinion. TechniTrader is not a broker or an investment advisor; it is strictly an educational service. There is risk in trading financial assets and derivatives. Due diligence is required for any investment. It should not be assumed that the methods or techniques presented cannot result in losses. Examples presented are for educational purposes only.