Changes to Market Structure Alter Indicator Interpretation
TC2000 users have a huge advantage over other Retail Traders as they have the power of Worden Indicators at their disposal. However recent changes to the Market Structure have altered how Traders should interpret these indicators. This is because of the changes to how large lots buy and sell stocks, the various Market Participant Groups who use large lots, and the Order Types available to them.One of the most common mistakes when using Balance of Power is to assume that long red bars represent distribution. This is a highly oversimplified analysis of one of the most powerful indicators ever written.
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To use Balance of
Power properly Traders must also analyze the following:
1. Where in the trend
is Balance of Power showing color or is it neutral gray
2. How long are the
bars and the length of time they are a color
3. The relationship
between price patterns and Balance of Power bars
4. Liquidity and
shares traded
5. The current Market
Condition
There is a chart
example below with an explanation of how to properly use the Balance of
Power, which is in the bottom chart indicator window. The indicator signal
may look totally off track, but that is simply because you may not know how to
read this indicator. Let me take you step by step, by first noticing the Trend.
This stock has been in its own bearish Downtrend for a year now, and a Weekly
Chart View shows the classic top.
Also see that it is
at a prior low, and that Balance of Power had a lot of red bars that
turned gray recently over the past couple of weeks. This is NOT distribution.
This is the final capitulation selling by Smaller Funds who trade very
similarly to the retail crowd, because they have a lack of technical education
and their Volume Weighted Average Price orders trigger AFTER a High Frequency
Trader Volume indicator spike.
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Indicators Training webinar to learn why volume is as important as price
analysis, and why volume leads price.
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I have noted the
Volume spike on the chart for you with a red arrow. High Frequency Trader
downside action with high Volume, triggers automated Volume Weighted Average
Price orders which are overly popular with Small Funds Managers. They
accidentally are SELLING, against the giant Buy Side Institutions buying while
using Alternative Trading Systems which create Dark Pools.
Note also on this
Weekly Chart View that Volume is LOWER during the capitulation period and
rising as giant Institutions start buying large lots of stock in Dark Pools.
Now let’s look at
the same stock using a Daily Chart View below. It is easy to see the huge High
Frequency Trading order spike on Volume, which also turns Balance of Power
bars RED and long.
Look at the
relationship between price action after the High Frequency Trader Volume. See
how Balance of Power has a “Shift of Sentiment™” pattern as the Dark Pools
quietly accumulate shares, as Smaller Funds are dumping. Giant lot orders are
firing off as the Smaller Fund Volume Weighted Average Price orders, sell into
the Dark Pool Buy Zone™ of the giant Institutions buying.
This slowly shortens
the indicator bars, AND turns them gray. Always use gray bars not yellow bars
as the neutral color for this indicator. Gray is commonly a neutral color,
while yellow usually means caution. You should not be reacting cautiously at
this point.
The “Balance of
Power” which is what this indicator is named after, suddenly stops the
downtrend and begins the Bottoming Formation.
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Management Planner Webinar which includes determining personal share lot size,
how many trades are needed to meet goals, number of stocks to trade, risk
tolerance, and price range for trading and investing.
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The answer is because giant Buy Side Institutions use Time Weighted Average Price orders to incrementally buy huge share lots of the stock. They are liquidity takers, not liquidity makers. So Professional Traders and High Frequency Traders can discover this liquidity decline, and react by trading the stock up suddenly causing momentum action that YOU can trade.
Summary
The Worden Indicator Balance of Power is one of the most powerful indicators available to Retail Traders. Usually this type of highly sophisticated indicator is only available to Professional Traders using proprietary trading platforms. It has changed over the years as the market has changed. Learning to read the new patterns is not difficult, but it is very important. Knowing where the Dark Pools are accumulating, can help Traders find excellent momentum stock picks BEFORE price begins to run.
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TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.
Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
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