Changes in Market Structure with New Order Types, Use of Dark Pools, and High Frequency Traders
Many traders are
complaining that their favorite Technical Patterns no longer work, or work some
of the time but fail more often than not. Technical Traders who have relied
upon Technical Analysis patterns that were identified, named, and written about
starting in the 1970’s are finding these once very consistent patterns are now
questionable.
Is Technical Analysis
broken as many traders claim? Can Technical Analysis still be used or should
you just go back to guessing, or abandon stock trading for some other riskier
trading instrument?
Go watch the
Technical Analysis Webinar with Candlestick Chart Analysis, and learn How to
Find and Analyze Stocks, about Market Conditions, and Trading Styles.
The fact is that
Technical and Retail Trader training for Technical Analysis has not kept up
with the changing Market Structure.
Why favorite
technical chart patterns are no longer reliable is due to changes including new
order types, new venues, giant Institutions using Dark Pools in Alternative
Trading Systems, High Frequency Trading Firms with millisecond trading
capabilities, the Retail Broker Oligopoly, Professional Traders First Of Day -
End Of Day, and many more.
These structural
changes to how the professional side trades has left most Retail Traders far
behind in the dust, with Technical Analysis training that is outdated and not
keeping up with the patterns now common in stock charts.
Go watch Volume Indicator
Training Webinar to learn why volume is as important as
price analysis, and why volume leads price.
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to the TechniTrader
It is not Technical
Analysis that needs repair, nor should Retail Traders stop using it. Technical
Analysis works, however the patterns have changed because how professional
trading has changed. Learning the new Relational Analysis which incorporates
more data in to stock chart analysis is the answer. Relational Analysis builds
upon the foundation of training from Technical Analysis, and advances the
trader’s skills to a professional level.
See the chart example
below.
The stock formed a
short term “Basing Bottom™” which is created when giant Buy Side Institutions
using Dark Pools are quietly accumulating a stock, with a specific price range
to buy or stop buying called a Dark Pool Buy Zone. This quiet accumulation
using Dark Pools is one of the reasons why favorite technical chart
patterns are no longer reliable. The automated order type they use is generally
called a “Time Weighted Average Price” order.
There are numerous
variations of this professional only style order, which can be placed via
Alternative Trading System venues which are Over-the-Counter orders. These
orders search for liquidity, and pull orders from everywhere because these are
huge lot orders.
What happens when
High Frequency Trading Firms discover this accumulation is a Shift of
Sentiment™ from selling to buying, and the stock moves up with momentum for a
few days. This is followed by Smaller Funds of which there are many thousands.
Smaller Funds use automated orders also, however their orders are sent to
exchanges and other venues rather than Dark Pools. Their order type is based on
Volume surges and are called “Volume Weighted Average Price” orders, so once
the High Frequency Trading Firms create a volume surge then Smaller Fund orders
trigger. Smaller Funds lack the massive buying power of the giant Institutions,
and must rely on the retail crowd or professional traders to move price.
Their buying is the
final phase of the run up out of a “Basing Bottom” formation. The stock forms a
“Flat Top™” formation, which is a short term sudden top after Professionals
start taking profits. Professionals taking profits sometimes trigger High
Frequency Trading Firms orders, and can create sudden down trend runs or gap
downs which did not happen for this stock.
Now the action is a
VOID pattern, because there is a lack of both buyers and sellers of any
importance. So the stock is forming many small Doji candlesticks or tiny
Indecision Day candlesticks, and has no momentum energy to drive it
upward.
Go to the Learning
Center and watch a wide variety of training webinars including Bollinger Bands,
Candlestick Patterns, How to Improve MACD, and many more.
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Summary
Relational Technical
Analysis™ helps
Retail Traders interpret what is going on in a stock chart beyond the basics.
When you understand the dynamics behind the price action, you can decide when
to enter, how to enter, and when to take profits for significantly higher
profitability with very low risk.
TechniTrader
The
Gold Standard in Stock Market Education
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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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.