Understanding How to Recognize the Pattern and Profit
Shortly after the
change from fractions to decimals and the advent of high frequency trading
companies, Dark Pool Venues became popular with the largest institutions both
Mutual Funds and Pension Funds. These are both BUY SIDE Institutions which is
extremely important to note nowadays, as the Buy Side is taking over the
dominant position for the inner circle of the Market Participant Groups. That
dominant position had been held by the SELL SIDE Institutions until recently.
The term refers to
the fact that these trading venues are not lit, or are “dark” in terms of the
ability for all traders from all 9 Market Participant Groups to see their
orders in the queues via the Market Maker books.
Dark Pools are now
the most important Market Participant Group for Technical and Retail Traders to
learn to trade with, as they move millions of shares of stock beyond the lit
exchanges. Because of the types of orders Dark Pools use, and the exotic
routing systems available exclusively to Dark Pool venues, these giant lots create
specific technical patterns that expose their presence.
Platform Market
Conditions did not exist prior to 2002, and became an established pattern in
2005. Therefore most Retail Traders have never heard of this Market Condition.
The Platform is a
sideways candlestick pattern that is extremely precise, controlled at the low
and the high of the range by Time Weighted Average Price TWAP orders which are
multi-legged stock orders often tying several instruments together.
As an example, if a
Dark Pool decided to buy 3 million shares of a stock over a 2 week period of
time, the order would also include Buy Put Option orders purchased at the same
time as an insurance policy. This is a common usage of the TWAP complex
multi-leg order.
For Technical and
Retail Traders, learning to identify the Platform candlestick pattern is
important because Platforms constrain price for weeks to months, while drawing
liquidity slowly but steadily which creates underlying energy that breaks to
the upside in the Platform Market Condition.
Accumulation is often
the term used for this type of order, however it is also employed by the huge
trading floors most giant funds have for trading short-term as well.
The “Rule of 3”
for Mutual Funds once limited the short-term activity of huge Mutual Funds, but
that rule has been gone since the late 1990’s, and giant funds can and do at
times trade huge lots short-term. The problem for Technical and Retail Traders
is that they cannot see this activity, and it does not show up during open
market orders on exchanges or intraday charts. Dark Pools are permitted to
delay their orders to the National Clearing Houses until after the market is
closed OR pre-market.
The chart example
below is a stock that has been building a Platform, that just broke out to the
upside.
This type of run
often surprises Retail Traders who then attempt to chase the run, rather than
entering before the run. This is an excellent one day run for Day or Swing
Traders. This stock example offered an excellent, easy entry, and was an
excellent run. Most Retail Traders do not recognize the Platform pattern, and
have no idea how to recognize the Dark Pool Buy Zones™ range. Properly
recognizing Platforms and Buy Zones requires using indicators based on both
Volume AND Price patterns. What defines the Platform is the control of price
and the leading qualities of the Volume indicators. I call this Relational
Analysis™ and it is far superior to Technical Analysis, which just focuses on
Price and price indicators.
Summary
Why do these patterns
breakout with such huge Volume and Price surges? It is because after the giant
Funds have purchased all the stock they want, they “leak” out news that they
have been acquiring the stock. This triggers High Frequency Trading HFTs
algorithms on the inner circle news, OR Professional Traders using their
proprietary custom indicators. They discover the liquidity draw and quickly
jump into the stock, ahead of the HFTs which trigger the high frequency trading
altos.
These are usually ONE
day events. Learning to recognize Platform Market Conditions and then using
the Platform Candlestick Patterns for an entry, allows for higher profits
with lower risk.
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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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