Current Thoughts On Dark Pool Entries and Exits

 

Something has been bothering me this week.  I've been using RTH data for trade setups, and here's what happens.

1. Massive selling at a top
2. Correction
3. Massive prints after the correction
4. Make an entry when price drifts over the prints
5. Price keeps leaking down
6. Either let account draw down or stop
7. Price picks up

Let's look at the data for TWTR.  They cancelled Trump and the stock took an immediate hit.  I love setups like this.  The boys at mission control look for news like this for selling.  Then they start buying when you're mad at TWTR and not looking. 

Starting 12/18, there were already selling TWTR heavily.  That's north of a billion in 2 days.  Did they know about Trump already?

They continued sneaking money out New Year's even and that first week of January.  Another $850M

We got many signals to exit but only if watching the after hours prints.  Hint:  most people don't.

We get massive prints on 1/11, price jumps up, and we think the rebound is underway? Dark pool traders are trained to look for prints and buy when price goes over them.  That would mean you buy over that $47.16 RTH print.  If you did that, price kept going down to $44.40.  $3 draw down on a $47 stock is enough to feel real pain. 

Then the dark pools cool off for a couple of days and you get more heavy prints on 1/14 and 1/15.  The boys are starting to average in here.  They also draw down around 2.5% those days.  Let's say their average price is $46 on that $1B.

Now fast forward in time to 2/9 (earnings day after hours that day).  Prints are 300% normal size that day and my app would show us those prints at 4:20pm (before earnings).  I would have interpreted this as selling before earnings.  That would have given us $46 entry and maybe $61 exit or about 30% gain.  Not bad.  A trailing stop would have done even better.  Looks like they continue to sell those highs up to current data.

Here is a summary of my thoughts:

• I tend to think that first heavy print after a drop is short covering.  Rise in price is due to a short covering rally, likely short lived, and a lower low is coming after that.  That tail is fake on the daily candle.
• Stops should be tight and positions small if buying what may be short covering rally, breakeven when it goes positive would be the best.  These typically go up 2-3% from a low that day, so it can trick you. 
• Probably better to let the stock cool down some after the drop.  Watch for heavy AH prints and buy the next day or even the next couple of days in tranches.
• Waiting for at least 1 green daily candle may decrease the risk
• Look for a tail on a daily candle or doji's
• Wait for a lower low (with divergence) or a double bottom
• Daily volume is useless, because dark pool volume will not show in the daily chart
• After Hours prints are much more important that I originally thought.  They need to be combined with RTH, and my app does not do that yet.
• Some good setups will be missed if using these parameters, but they happen every day.
• These rules will likely reduce drawdowns by 2-5%
• The parameters can be used to score a setup.  The more matching parameters, the lower the risk.
• A high number of my failed setups follow this same pattern.  I've looked at over a dozen.