Volume Breakdown: How Much Comes from Technical Trading?

[Frane 10]

How much of the volume comes from trades done based on technical analysis? I would assume it is really hard to get any data on this, but I would be happy to hear about any studies or even educated guesses. I am mostly interested in the stock market, but also glad to hear about forex or commodities if this information is available there.

 

One reason why I am asking is that I started to wonder why most technical trading books, blogs, etc. describe the market as something only affected by information becoming available to people and psychological factors, resulting in patterns or signals that can be detected by indicators. Rarely do I hear people talking about patterns resulting from people doing technical trading, or trading systems based on assumptions of which other trading systems people are using. For example if enough people are trading according to some indicator, it would be possible to develop a system exploiting this. Why is this not so common? Is it because technical trading is so rare that it has no impact on the stock price, or is it because so many different systems are used that it averages out or becomes random noise, or is there some other reason?

 

I appreciate all help. Especially any volume breakdown information.

[ARTjoMS 10]

This reminds me of this quote: "One idiot can ask more questions than ten wise men can answer."

 

One reason why I am asking is that I started to wonder why most technical trading books, blogs, etc. describe the market as something only affected by information becoming available to people and psychological factors, resulting in patterns or signals that can be detected by indicators. Rarely do I hear people talking about patterns resulting from people doing technical trading, or trading systems based on assumptions of which other trading systems people are using. For example if enough people are trading according to some indicator, it would be possible to develop a system exploiting this. Why is this not so common? Is it because technical trading is so rare that it has no impact on the stock price, or is it because so many different systems are used that it averages out or becomes random noise, or is there some other reason?

 

I certainly don't agree with your observations.

 

Technical trading certainly has an impact on price.

[Frane 10]

Thanks for answering ARTjoMS, but could you please point me into the right direction where I can find information about trading systems designed "against" other technical traders or any theory related to this topic?

[ARTjoMS 10]

trading systems designed "against" to exploit other technical traders

 

I don't think there is any good theory written on this subject - it simply comes down to your level of understanding. Most of the "technical stuff'' has some idea (i.e. exploiting market inefficiencies) behind it (although that may not be stressed).

 

1) First you should broader your understanding of what technical analysis is. (because your's seem to be very short sighted)

2) Then you should understand who are participating in the market.

3) Then you should examine reasons why they open or don't open their positions.

(2 and 3 are manageable tasks.)

4) Finally the last step will be called ''doing the analysis''.

 

Hint: Focus on concepts -> don't try to exploit participants via indicator that they are using. Why? Because that will be like a drop in the ocean indeed.

[Patuca 13]

Aprox 70% to 80% of volume is now by algos...hft... institutions....Bottom line is that institutions are what moves the markets. Individual retail traders have little ability to move the markets. Except in extreme cases of panic...etc.

 

All day long its a fight between the bears and the bulls..one institution pitted against the other. Both make money. Momentarily one side wins out and a trend starts. Public jumps on the trend for the ride.

 

Patterns form because of human nature and the nature of the markets. A chart from the 1950's i.e. before computers and hft..algos...etc looks much the same as charts from today You see trends..pullbacks...ranges..channels..flags.. triangles...breakouts...etc simply because it has always been that way and will always be that way regardless of the actual technical tools used to trade the markets. Whether that tool is a ticker tape machine or a complex computer or newly devised trading systems based on technical analysis. Institutions drive the markets but institutions have people behind them designing the myriad of trading systems they use. Then the retail traders devise system..indicators. As long as people devise stuff human nature will enter in.

 

Can having a strategy that gets it edge off of trading off a pattern be profitable? Sure. For instance, once a breakout has become a channel which in turn morphs into a range we know that most range trading will become the battleground of the bulls and bears for a while..usually. Many breakouts out of the range will be attempted but most will fail. Aprox 70% of the time breakouts will fail. So, if price has been in a range and goes to the top of the range one can short it knowing that the probabilities favor a breakout of the range failing and price reversing at the point of resistance. If one then actually shorts at the resistance tof the range then ones trades is, yes, contributing somewhat to the selling pressure. However, it is institutions that will drive the price back inside the range. That is, the bearish institutions. The bullish ones will let price drop to the support level in the range then they will buy driving price up. Price is always trying to break out of the range top or bottom hence it s a battle between the bulls and the bears. One can look at the price action within the range and sometimes get a fair idea which direction the breakout will take when a successful breakout does eventually occur.

 

So..a range is a pattern. Devising a trading system off of such a pattern can be profitible and in itself will contribute to the pattern being formed. It can be automated or discretionary. It can be software driven or simply visual. It can be accomplished trading off a computer screen or handmade charts. It doesn't matter. Trends in the form of breakouts and channels....with pullbacks...pennants..triangles...will always be there. Ranges will always be there....with wedges..micro channels.. pullbacks nested in the ranges. These patterns form because of human nature and the nature of the markets and the insuing battles between the bearish and bullish institutions.

[Frane 10]

Thanks Patuca. Are you saying that the 70-80% of the volume coming from institutions are pure technical trading? Would you guess that the share of fundamental trading is 20-30% then? Even though most mutual-funds and big players invest fundamentally, they most likely do very few trades compared to technical traders and especially HFT. But I also have heard that some of the algorithmic trading is just big players buying or selling based on fundamental analysis, but they use algorithmic trading systems to be able to buy/sell optimally without affecting the price to much, isn't that true?

[Patuca 13]

Thanks Patuca. Are you saying that the 70-80% of the volume coming from institutions are pure technical trading? Would you guess that the share of fundamental trading is 20-30% then? Even though most mutual-funds and big players invest fundamentally, they most likely do very few trades compared to technical traders and especially HFT. But I also have heard that some of the algorithmic trading is just big players buying or selling based on fundamental analysis, but they use algorithmic trading systems to be able to buy/sell optimally without affecting the price to much, isn't that true?

I would say about 70% of trading volume is algo ..hft ...many, if not most of these being institutions. That is, this 70 percent are daily fighting it out in the market trying to grab their slice of the pie in tiny profits but lots of volume. Millions of shares...contracts..turning over daily. The other 25% of the volume is institutions...fundamental and technical..etc. The last 5% of the volume is generated by pipsqueaks like you and me all most other traders on these forums...the gamut of retail traders..etc.

 

The 70% don't actually give much direction to markets. They are going for tiny 1..2..3... ticks profit on piles of contracts...pennies on shares over and over all day long via algo...numerous hft programs back and forth..back and forth....

 

The other 25% do move the markets and give it direction. The 5% basically give little to no direction to the market.

 

I may be off on the percentages but i think pretty close. It could be 75..20..5..

 

That is why i don't worry about hft. Many institutions are not going to mess around with hft. Alot of others will. My only concern for hft is a program going rogue ...i.e. Like what happened to knight here a while back and the flash crash a few years back. Otherwise, hft may actualy be helping pipsqueak traders by providing liquidity....like we really need it...whatever...

 

Yes, I am sure some fundamental firms use algos too..they would be in the 25% and yes they would be market movers.

Edited August 3, 2014 by Patuca

[zdo 20]

Frane,

 

Admirable questions. In case you haven't 'settled this yet, I’ll add more. We’ll show “"One idiot can ask more questions than ten wise men can answer."” how it’s done. :rofl: Seriously, it was a good idea for ARTjoMS to challenge your underlying assumptions, constructs, paradigms, models…There are no other objective tests / easy places to look that will substitute for sustained self exploration to discover the salient operational characteristics of your ‘marketDNA’. Questions questions questions…

 

Like.. Have you really looked to see if the two categories - technical and fundamental - provide an adequate categorization framework for you?

For example: Fundamental and technical traders seek truth. Between/around them are hoards of traders and algos who will accept, even seek, the current STORY/lie for their information… and there are multiple categories within those hoards…Anyways, in pure form, fundamental traders seek to discover true value regardless of the string of stories that emerges. In pure form, technical traders also seek to exclude the story from their choice making. They really want their decisions made sans the Story’s influence.

Truthseekers don’t deny the story (ie exclusion is not the same as denial). They just seek an information system that doesn’t rely on the content of the current story.

 

NO ONE can avoid patterns. Each trader’s marketDNA predisposes what patterns s/he can readily include and which ones will be ignored or excluded - sometimes even to the point of opposing (except on trading forums of course - where no one has ever discounted / trashed someone else’s marketDNA or slammed stochastics or…). Some deny they utilize patterns… not realizing their brains are just using patterns that have been anointed as NOT Patterns. And briefly…

…

every hft algo attempts to replicate what the marketDNA of its progenitors would do at their best.

…

…to the “volume” questions...

 

“market movers.” … Will it work for you to see certain groups or categories and percentages as what ‘moves’ the market? Would knowing the aggregate percentages really be useful to/in your marketDNA? Even if you knew the absolute tendencies of those percentages you ask about, is the variance in those percentages across a session, a week, a season, an epoch extremely high?

 

…

 

…10000 shares this second is not the same as 10000 shares in the same or next second. ‘Volume’, even HUGE volume, that accepts the bid or ask does not move the market. Influxes of volume willing to buy above the bid (or sell below the ask) is what moves the market.

 

…

Re:

“…enough people are trading according to some indicator, it would be possible to develop a system exploiting this. Why is this not so common? Is it because technical trading is so rare that it has no impact on the stock price, or is it because so many different systems are used that it averages out or becomes random noise, or is there some other reason?”

Those were perfect questions for traders from ~ 1979 to ~ 1995. Then, “a system exploiting this” really was ‘common’ . During that time groups of floor and near floor traders knew what technical traders were looking for and more importantly they knew what limited subset of timeframes their ‘patterns ‘ were being found on. Ie way back when, a portion of floor traders had the marketDNA to know what patterns were being watched by the outside and which time frames were being utilized. (the term ‘timeframes’ being used here much the same way as James Dalton used it) AND they could engineer sufficient influxes of volume willing to buy above the bid (or sell below the ask) to fade a “technical” pattern PLUS they were privy to timely information about whether the ‘campaign’ was working or not and could quickly bail if not… now that’s an Edge  No more. A geometric explosion in the quantity of possible timeframes made it to “like a drop in the ocean indeed” and has largely eliminated theEdge available in fading the ‘technical’ patterns of that day.

So, the old technical patterns multiplied themselves out of usefulness - except for a few with exceptional marketDNA for it. But are the same ‘fading games’ still being run on the Story of the day - like they used to run on the ‘technical of the day’? Do far more have marketDNA for running these fadegames on the Story of the day than ever had the marketDNA to ‘exploit’/fade ‘technicals”. Has fadegame on the Story subsided at all?

…

Not that we’re running low on idiot questions - but here’s another one…

Have you studied ‘old-school’ VSA? (the ‘story’ part - not the ‘volume pattern’ part)

…

 

btw in case I didn’t say it before - You are asking excellent questions.

…

 

I don’t have time to continue… or fill in the ...'s

... would love to post some references … but alas, they are not allowed in here. (especially if they challenge Story/lie in any way)

… TL has become a perfect example of what happens to exchange in an over-regulated environment.

 

hth

[MightyMouse 12]

I would say about 70% of trading volume is algo ..hft ...many, if not most of these being institutions. That is, this 70 percent are daily fighting it out in the market trying to grab their slice of the pie in tiny profits but lots of volume. Millions of shares...contracts..turning over daily. The other 25% of the volume is institutions...fundamental and technical..etc. The last 5% of the volume is generated by pipsqueaks like you and me all most other traders on these forums...the gamut of retail traders..etc.

 

The 70% don't actually give much direction to markets. They are going for tiny 1..2..3... ticks profit on piles of contracts...pennies on shares over and over all day long via algo...numerous hft programs back and forth..back and forth....

 

The other 25% do move the markets and give it direction. The 5% basically give little to no direction to the market.

 

I may be off on the percentages but i think pretty close. It could be 75..20..5..

 

That is why i don't worry about hft. Many institutions are not going to mess around with hft. Alot of others will. My only concern for hft is a program going rogue ...i.e. Like what happened to knight here a while back and the flash crash a few years back. Otherwise, hft may actualy be helping pipsqueak traders by providing liquidity....like we really need it...whatever...

 

Yes, I am sure some fundamental firms use algos too..they would be in the 25% and yes they would be market movers.

 

All players are important in the market. Large and small. Short or long in terms of both direction and time in the market.

 

HFT or algos, or whatever you would like to refer to them as, are the trading idiots. Idiot in the sense that they trade with a finite set of rules.

 

You don't have do be brilliant to make money in the market. Even an idiot can exploit an arbitrage opportunity while it exists with the right set of instructions.

[jpennybags 11]

All players are important in the market. Large and small. Short or long in terms of both direction and time in the market.

 

HFT or algos, or whatever you would like to refer to them as, are the trading idiots. Idiot in the sense that they trade with a finite set of rules.

 

You don't have do be brilliant to make money in the market. Even an idiot can exploit an arbitrage opportunity while it exists with the right set of instructions.

 

I wouldn't go so far as to say... "idiots". These "things" are designed to trade against each other... some do it with a great deal of success, and I would say that there are some brilliant people behind the effort.

 

This is my take on it (and it is agreed that I am an idiot): There is no way that anyone other than "god almighty" can understand fully what goes on in the market. It's so complex, and there are so many variables... who could comprehend such things? It's like asking why each leaf on a tree is different from one to the next. The retail trader need only concern him/her self with who is winning the struggle in what ever time frame you have chosen to trade in. It's a struggle that goes on everyday. And to MM's post... "you don't have to be brilliant".

[Frane 10]

Thanks for all the good answers. I have done some research on my own as well. Just to mention some, I have come across a book "Trade The Trader", which is about the same topic and watched the videos by Martin Cole (Market Makers Method) on youtube. I am surprised why there is so little information about this kind of stuff compared to the millions of books and websites teaching the same old patterns and indicators.