Changes In Chart Interpretations
We can draw on ancient of sources of reasoning like Edwards and Magee to remember that a price chart makes a picture of how the stress between buyers and sellers has been resolved over a time period. It stands to reason that if 80 percent of the trades are made by participants with similar trading styles, all trying to profit on the same timeframe, that situation will show up as a picture on a chart. It is my conjecture that the low volume low volatility chart patterns are the result of high frequency trading programs and that these patterns evolve because most of the algorithms create and manage low volatility uptrends. Whether the firms are market makers or propriety traders, they all try to succeed by manipulating both prices and the behavior of traders. Anytime the market inches higher day after day on low volume, the high frequency traders are having their way. This is the pattern that shows up charts when high frequency traders are dominating the market and probably making enough profit to stay in business for a while longer.
Oddly this chart pattern is seldom recognized for what it is and most traders still rely on standard technical analysis dogma to make decisions. Charts describe the activity of the participants who make up most of the volume. Traditional technical analysis evolved as a way to study the behavior of traders who now comprise only about 3% of the volume.
I don’t pretend to have all of the answers a trader needs to prosper when there are parasites in the market. For now, I don’t make any short term trades. I have lengthened the time span I operate in and short only stocks in the strongest downtrends. If I was a bull, I wouldn’t adjust at all because the high frequency firms give the market a temporary strong positive bias.
What I find critical is to never take a new position based on a small break out one way or the other from one of these low volatility patterns. Also, never short one of these patterns. The low volume and low volatility are signs of weakness. They are signs the uptrend is being managed successfully. For short selling I short only weakness when volatility increases and just cover the ones that go against me.