Monday, April 1, 2013

The Changing Landscape of Technical Analysis

MetaStock SPRS Series - Week 112 - TechniTrader® Stock Discussion for MetaStock Users - The Changing Landscape of Technical Analysis - April 1, 2013
By: Martha Stokes C.M.T.

The Financial Markets are undergoing massive internal structural changes that are impacting price and volume action, that retail traders depend upon due to their use of charts and technical indicators for stock pick selection and trading.

As the Financial Markets evolve so too are the price patterns that form on charts. This requires that retail traders first be aware of these new technical patterns, and secondly understand what those patterns mean for short term trading styles.

Candlesticks have become the standard for most retail traders and there are numerous brand new formations. When candlesticks were introduced to the western markets in the early 1990’s by Steve Nisson, the translation from Japanese commodities markets trading was exact and precise including the unique and artistic visual names assigned by the Japanese to different formations.

What western retail traders now must learn are the new patterns developing due to several factors:
  1. The increased use of High Frequency Trading venues on exchanges. These affect intraday and day traders mostly as HFT action on the millisecond causes more gaps and sudden price reversals and whipsaws now than were present a few years ago.
  2. Dark Pools are off the exchange aka over-the-counter transactions, that are delayed orders not displayed on the exchange platforms.
  3. If Dark Pools liquidity is insufficient to fill their orders, then their activity can suddenly alter the exchange transactions when their orders move to the exchanges for liquidity. This can cause a ripple effect in price action most retailers do not anticipate, which can cause whipsaw activity due to HFTs triggering as a DP is identified by the computer generating HFT order flow.
  4. Smaller Funds buying creates speculative runs similar to retail traders system buying order flow. This creates cluster orders that the HFT computers identify as large lots activity which can cause sudden shifts of sentiment patterns on TechniTrader® Quiet Accumulation TTQA and other large lot indicators.
  5. Since HFT orders are traded on the millisecond which means 1000 trades per second, with some HFTs now firing off 3000 per second and these orders which can be small lot per order, actually become large lot patterns for retail charting software which is based on the minute scale or even one second scale tick. Most retail charting software is not designed to track true tick by tick transactions but bases tick by tick on a second by second timeframe. So these lots combined are huge lot orders and do affect indicator patterns that use tick by tick formulations.

TTQA is a large lot tracking indicator written by TechniTrader® specifically for MetaStock Charting Software. What it is showing on the Dow in 2013 is a high level of small fund activity buying Dow component stocks. Dark Pool activity has shorter bars and shifts green to gray during quiet accumulation phases, as the giant funds buy incrementally over several weeks huge volumes of shares are spread out and then do not impact price or volume. Volume spikes are always HFT activity.

Trade wisely,

Martha Stokes, C.M.T.
Member of Market Technicians Association
Master Rated Technical Analyst: Decisions Unlimited, Inc.
Instructor and Developer of TechniTrader® Stock Market Courses
MetaStock Partner
©2013 Decisions Unlimited, Inc.
