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What are High Frequency Trading Firms and Dark Pools? 

Learn Price & Volume Analysis to Identify Them

The Financial Markets have been 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.

Candlestick charts have become the standard for most Retail Traders, and there are numerous brand new candlestick 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.

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The automated market of today with High Frequency Trading Firms and Dark Pools, have caused new candlestick chart pattern formations.

There are new patterns developing are due to several factors which include the following:

1. The increased use of High Frequency Trading venues on exchanges. These affect intraday and day traders mostly, as High Frequency Trading 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. These are used by the giant Insstitutions.

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 Retail Traders do not anticipate, which can cause whipsaw activity. This is due to High Frequency Trading triggering as a Dark Pool is identified, by the computer generating the High Frequency Trading order flow.

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4. Smaller Funds buying creates speculative runs similar to Retail Traders system buying order flow. This creates Cluster Orders that the High Frequency Trading computers identify as large lots institutional activity, which can cause sudden Shifts of Sentiment™ patterns on TechniTrader Quiet Accumulation TTQA Indicator and other large lot indicators.

5. High Frequency Trading orders are traded on the millisecond which means 1000 trades per second, with some High Frequency Trading now firing off 3000 per second. These orders which can be small lot per order, actually become large lot patterns in Retail Traders 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.

High Frequency Traders and Dark Pools in Automated Market MetaStock chart- TechniTrader

The TechniTrader Quiet Accumulation TTQA Indicator in the bottom chart window, is a large lot tracking indicator written by TechniTrader® specifically for MetaStock® Charting Software. What it is showing on the Index chart example above is a high level of Small Fund activity buying. Dark Pool Institutional activity has shorter bars and shifts from green to gray during Quiet Accumulation phases. This is because the giant Institutions buy incrementally over several weeks, so huge volumes of shares are spread out and then do not impact price or volume. Volume spikes as seen in the middle chart window are always High Frequency Trading activity.


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

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MetaStock Tools - TechniTrader custom chart templates with the hybrid indicators shown and discussed in this article are available for MetaStock users. To learn more Click HERE


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Trade Wisely,

Martha Stokes CMT

TechniTrader technical analysis using a MetaStock chart, courtesy of Innovative Market Analysis, LLC dba MetaStock

Chartered Market Technician
Instructor and Developer of TechniTrader Stock & Option Markets Courses
This Stock Discussion and Training Lesson is sponsored by a MetaStock® Partner

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