The New Breakout Trading Strategies of Professional Traders
With all the changes to the market structure and venues for trading stocks by the various market-participant groups, many strategies of the professionals have been adjusted or reinvented in order to fit the new realities of trading.
These new strategies are also something retail and technical traders can use in order to help them keep up with the new technical patterns and sudden momentum runs, which are both expected to be the norm this fall and winter.
Professional strategies are considered best when they are ambidextrous or can be employed for both upside and downside swing momentum trades.
Bollinger Bands are a popular indicator for the sideways price action which forms prior to a breakout, also called consolidations or platforms. However, while Bollinger Bands do reveal compressions that precede a breakout, determining the direction of the breakout is what is most important for successfully trading sudden momentum breakout patterns.
Quality indicators reflect what side of the transaction the large lots are trading. So using quality indicators alongside your Bollinger Bands is one way to determine the direction the stock will take when it breaks out.
Pro traders are relying more and more on volume and quantity indicators in order to be able to determine which side of the transaction the larger lots are dominating. Since the Dark and Twilight Pools' buying and selling is delayed, understanding whether the large lots were on the upside or downside of the tight price action is crucial to determining whether the stock will break to the upside or downside.
Since Dark and Twilight Pools prefer not to disturb the normal price action of that day or intraday, these often-huge lots do not move price with the way they control their accumulation, which is actually responsible for tight sideways price action. Therefore, incorporating more quantity analysis, which reveals what side of the transaction the larger lots are on, helps professional traders enter before the big moves caused by HFTs reacting to and triggering on news events.
As an example, Cisco Systems Inc. (NASDAQ: CSCO) announced its earnings after market close, which then triggered a High Frequency Trading reaction the next day with huge downside volume. Pro traders entered early, preparing to sell short as it was obvious, from the quantity and large-lot indicators they use, that the institutions were not accumulating, but, rather, were distributing prior to the earnings announcement.
When large lots are selling prior to an event, the pressure to the downside compresses price; however, since the large lots use specially-designed orders in the Dark and Twilight Pool transactions, the selling doesn’t move price much, and in fact, often the retail investors buying on a dip will move price up as the larger lots are carefully selling. This is not selling short until the pro traders enter, setting up for the HFTs' automated orders. Usually, pro traders are using end-of-day transactions in order to jump in ahead of the HFTs.
Pros want to be trading with the giant-lot and large-lot Dark and Twilight Pools, rather than against them.
Retail traders can learn to incorporate similar indicators which track quantity rather than price so that the large lots are revealed before the breakout occurs.
Martha Stokes, CMT