Top Advisors Corner

Martha Stokes: How to Use Velocity Runs for Swing Trading

Martha Stokes

Martha Stokes


Recognizing and Understanding Price and Volume Patterns

Swing Trading is a versatile style of trading that can be used by both Day Traders and Momentum Swing Traders. It is also the most lucrative of all the very short term trading styles providing exciting, fun, and rewarding trading for the active Technical Trader.

A key element in Swing Trading is the ability to identify Price and Volume patterns before the stock runs suddenly. Often times Technical Traders wonder where all that momentum came from, as they have not yet learned the trigger signals of specific technical patterns that precede sudden huge moves up. See the chart example below for Priceline.com Inc. (PCLN: NASDAQ).


How to use Velocity Runs for Swing Trading begins with understanding who, what, where, when, and why they occur. Study the stock chart PCLN to see that starting in late January 2016, the giant Buy Side Institutions began buying against the capitulation selling of the Smaller Funds and Retail crowd. For most Technical Traders, the end of January and first couple of weeks in February were “volatile” price action. What they did not realize was that the giant Buy Side Institutions using Dark Pools, were buying stocks intermittently. The TechniTrader® Institutional Scan which tracks them started to surge in numbers periodically during this time, and that was the first signal.

Then charts like PCLN began showing the Basing Bottoming Formations which are now common when Buy Side Institutions enter stocks. This was followed by the final drop instigated by High Frequency Trading Firms HFTs that began selling on retail news triggers. When HFTs trigger, the surge of volume this causes also triggers automated Volume Weighted Average Price VWAP sell orders used by Smaller Funds. 

Once the stock fell beyond the Dark Pool Buy Zone™ low, it then triggered the Time Weighted Average Price TWAP Buy Side Institution bargain hunting orders which is a surge of sudden accumulation.  This past week stocks that were in that bargain hunting “Buy Zone,” ran up with momentum and velocity. This caught most Retail Traders who were Selling Short completely by surprise causing them sudden losses. The Momentum Runs and Velocity Runs were then chased by some Retail and Technical Traders, while HFTs drove price upward. This is a common pattern out of severe bottoming patterns. The chart for PCLN shows this pattern clearly. Most Technical Traders missed the early signals.

To be able to take advantage of these sudden huge gains out of a bargain Buy Zone, Traders need to be prepared in advance.The key to how to use Velocity Runs for Swing Trading is to identify the first tier Buy Zone range of the Dark Pools out of the bottom, and to accept that volatile conditions occur when two major groups collide. Then it is important to be able to recognize that the Dark Pools are in control, even while the last capitulation run down is allowed to happen.

To enter on the Hurdle Buy Entry Signal, Technical Traders must be prepared in advance. This means identifying the first bottom tier Buy Zone range. Then they must wait for the capitulation selling, and anticipate the buy entry signal. 
Summary

After that it is a matter of holding, and not taking meager .25 cent profits but holding with a high degree of confidence and understanding of the Velocity Run mechanics. In this instance PCLN gapped hugely over resistance, which is how these runs typically behave. A Shift of Sentiment™ occurred in the Money Flow Index Indicator, in the bottom chart window. Volume, Volume Oscillators, Flow of Funds, and Accum/Dist patterns are the indicators required in this analysis as well as Spatial Pattern Recognition Skills SPRS for studying price patterns. 

There were numerous trades like this one last week, and it should have kept every Swing Trader very busy trading. These are common patterns after a sell down. Regardless of whether a Trader prefers Intraday Trading or regular Swing Trading, there were ample opportunities to enjoy the big gains. Learning to understand the who, what, where, when, and why of Price and Volume patterns is how Technical Traders earn very high incomes. 

Trade Wisely,
Martha Stokes CMT
www.TechniTrader.com
info@technitrader.com