By Jack N., Communications Analyst and Blog Contributor
Early in my investing career (“career” is a huge stretch, by the way), I figured it would be pretty hard to make money through short-term trading of stocks. Professional traders had sophisticated, hugely expensive computers needed to analyze technical charts using real-time data. I had, as I’ve said in a previous blog, a Commodore 64, and later a dial-up connection to Compuserve. (It was like the Internet, but without pictures and very little information).
Today, sophisticated trading tools, available at low to no cost, offer comprehensive finger-tip research to anyone with a computer. For do-it-yourself traders, the ability to react in a split second to real-time data can be invaluable.
That’s especially true during earnings season, when prices for individual stocks can be highly volatile. Price volatility can be heart-pounding, but if you use the right tools you might be able to take advantage of short-term mispricing in a security or capitalize on price momentum – also called velocity trading.
One starting point might be Velocity & ForcesTM in ScottradeELITE®.
This tool can help indicate a potential price direction in an instant for listed stocks and ETFs by focusing on pre-executed buy and sell orders. The forces portion shows the ratio of buy and sell orders. A 6:4 buy-sell ratio, for example, means 60 percent of orders are buys and 40 percent are sells. Velocity measures the order flow based on the 21-day average for a security. So a 200 percent velocity says the order rate is twice the 21-day average.
How can traders use this information?
The chart to the left shows a 3:7 forces ratio for SPY, an ETF that tracks the S&P 500. That’s a strong sell-side bias. Velocity is 1,000 percent above the 21-day average, suggesting high volume as well. This combination of a large percentage of sell orders coupled with high volume could be a sign of an impending downtick in share prices. The chart on the right, taken a few moments later, confirms that’s the case (compare the time periods between 13:30:17 and 13:30:54 for the two charts). SPY’s price – shown in the blue line below the pie chart – indeed falls. Typically, when you see a large imbalance in buys or sells, with velocity exceeding 500 percent or so, it is often followed by a price rise or decline.
Investors can use this tool, too, to help to determine whether they should delay a buy or sell order, or whether it would be wise to place a stop-limit-on-quote order.
It’s amazing to watch this tool. The numbers change constantly, especially in highly-traded securities, which can be a bit dizzying. You might want to get your feet wet by viewing lower-volume securities.
What do you find most fascinating about today’s online trading tools?
Jack N. is a communications analyst at Scottrade. He works to demystify the markets and the economy for all types of investors and traders.
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Articles, commentary, and opinions expressed on this site are those of the author and not necessarily those of Scottrade. Scottrade does not guarantee the accuracy of, or endorse, the views or opinions of the author.
The examples and/or strategies described in this blog are for informational purposes only and their use does not guarantee a profit. None of the information provided should be considered a recommendation or solicitation to invest in, or liquidate, a particular security or type of security. Investors should fully research any security before making an investment decision. Securities are subject to market fluctuation and may lose value.