Trading days where there's abnormally high volume on a stock on the NYSE

[fatrat]

I've been following SteveTvardek's advice on the NYSE. I started trading lower volume stocks and I had my second week of profit. Feels good, but there's more work that needs to be done.

I noticed, though, that whenever there's news on a stock or if there's abnormal volume, that I have a difficult time with the stock. It seems like the general rules go out the window, and mysteriously powerful buyers and sellers come in and blow out every level that would normally require immense buying power to take out. I get caught in little traps where escaping with small losses becomes immensely more difficult. Usually, I try to keep losses to less than 2 cents if I can; however, when there's a LOT of volume, in some cases this becomes extremely difficult.

Things I have observed:

- The spreads widen significantly

- What I perceive as floor broker/specialist activity in typical situations is much more transient; i.e., what I think is institutional-size blocks for sale at various levels changes dramatically. What's quoted in one second disappears altogether only a few seconds later.

- The moves are much, much stronger in magnitude, but the ends of moves move in the opposite direction just as maniacally as they did on the way down

So my question to the experienced folk:

Do you guys change your trading style during periods of higher volume? Do you throw out the standard rules of trading, try to spot a trend, and widen your acceptable losses? Or do you simply wait for a period of quiet before entering again, in hopes that you'll be on the right side of chaos when it strikes again?

Thanks all.

 

[Bitstream]

I never noticed the spread increasing when volumes rise, and neither a big difference in trend on same days in lower vs higher vol stocks.

And a stop of 2c is a bit too close if you can't time in perfectly your entries.

In generally I agree that price changes much more often when big vol are sustaining the stock, and that the settings when trading low vol or penny stocks are different overall, where stock price influences size and movements and where you usually can run into instit. buying or selling, programmed to flush out as many positions as possible.

But then again NYSE is not my cup of tea and what I said applies more to NASDAQ.

 

[fatrat]

Well, I trade DNA and FTO on the NYSE. I'm net positive on both stocks historically, but today, for example, when DNA tanked almost 4 points, I couldn't time an entry with any feeling of security. Today was one of those days where the sellers were on a rampage taking the stock down. I still didn't have the balls to enter, because this stock acts very crazy at times. I've learned to just chill and wait for periods of calm, but the chaos periods are just so full of movement that I want a reliable strategy to make money when they do actually happen.

What happens isn't so much that the general spread is wide [i.e., all the ECNs, regionals, specialists], but the New York spread is higher. I usually discount the ECNs when I'm reading the tape and pay specific attention to what the New York quotes are. ECN prints I use sometimes, but usually just to get a sense of how anxious buyers/sellers are to force a break-out.

2 cents is too much in my opinion. I get angry when I even just lose the spread. I've found that the only way I can trade profitably is by being super anal about losses, and just re-entering if I was wrong. The 2-3 cent losses add up, so I generally take a flat if I have so much as an inkling of hesitation. There are times when the stock does rally, but it doesn't bother me because at least it wasn't a full loss.

Quote from Bitstream:

I never noticed the spread increasing when volumes rise, and neither a big difference in trend on same days in lower vs higher vol stocks.

And a stop of 2c is a bit too close if you can't time in perfectly your entries.

In generally I agree that price changes much more often when big vol are sustaining the stock, and that the settings when trading low vol or penny stocks are different overall, where stock price influences size and movements and where you usually can run into instit. buying or selling, programmed to flush out as many positions as possible.

But then again NYSE is not my cup of tea and what I said applies more to NASDAQ.

 

[Szeven]

How do you trade $80 stocks with a 2 cent loss? The amount of shares on the bid/offer of high priced low volume stocks is so bad that I dont understand how you can buy or sell a reasonable amount of shares without incurring the risk of at least a 2 cent loss. I consider myself quite anal on losses as well, but I adjust my share lots downwards and stops/profit targets upwards as the price of a stock increases. If i feel comfortable with 2000 shares of a $20 stock i would probably only take 1000 of a $50 stock and maybe only 500 of an $80 stock.

When news or volume is high on at stock i find the trending clearer. I try to time my entry's by buying or selling in front of big orders. For instance on DNA if someone crossed down 100 lots to the bid, (assuming you do not have to wait for a downtick i am not sure on that stock) i would try to use 1000 or less shares and get auto-ex'd on the spec before the larger order fills at that price, or hit an ECN before the other daytrader cancels or is hit by someone else.

Hope that helps.

 

[fatrat]

Thanks for your response.

To answer your question: I generally only enter spots where I think I can escape with small losses. Some may call it insane, but I find that when I don't follow the rule, I get susceptible to those drops on DNA where the stock plummets a full 20-40 cents. Those are painful. If I make a trade that's a flat on DNA, I consider it a win. DNA has "explosions" from time to time, and they are not preventable unless you know precisely how to escape and don't hesitate.

The strategy gets hard to execute during periods of excess volume and activity because pockets of liquidity become more short-lived. That is, what typically passes for a large order no longer becomes a "large order" -- the buyers and sellers are far stronger than usual. You see prints flying by with regularity of 10k shares at a time. On DNA, for example, if you see a clear-cut 10k shares for sale at a level on a normal day, that's a minor anomaly and traders account for it. During high volume periods of buying and selling, 10k shares "ain't no thang."

Now, supposing you spotted the trend today and saw that it was dropping hard. Take for example the 1m chart on DNA today. At the end of one of the major sell-offs, the bounce back was a full 70 cents when all was said and done. The reversal was just as fast as the drop. So, assuming you'd jumped in front of what you saw as a large order on the way down, but happened to get short right before this reversal, you would've gotten hurt pretty hard.

Now, even if you had been trading with the trend, getting a fill on the way down anywhere near what appeared to be a large order is exceptionally difficult. DNA does require the uptick rule. This makes downside breakouts much, much harder to play. So, if all the day traders spot floor broker activity, getting a fill for the short is damned near impossible. It's much less difficult to short a top than it is a down-side break-out.

... While I'm on the subject -- I suck at playing the short-side. Is it even possible to improve the odds of a short fill for downside break-outs if there's the uptick rule? Chasing shorts used to be a huge problem for me, so I stopped doing it. If I miss the fill, I just wait until another setup develops.

Quote from Szeven:

How do you trade $80 stocks with a 2 cent loss? The amount of shares on the bid/offer of high priced low volume stocks is so bad that I dont understand how you can buy or sell a reasonable amount of shares without incurring the risk of at least a 2 cent loss. I consider myself quite anal on losses as well, but I adjust my share lots downwards and stops/profit targets upwards as the price of a stock increases. If i feel comfortable with 2000 shares of a $20 stock i would probably only take 1000 of a $50 stock and maybe only 500 of an $80 stock.

When news or volume is high on at stock i find the trending clearer. I try to time my entry's by buying or selling in front of big orders. For instance on DNA if someone crossed down 100 lots to the bid, (assuming you do not have to wait for a downtick i am not sure on that stock) i would try to use 1000 or less shares and get auto-ex'd on the spec before the larger order fills at that price, or hit an ECN before the other daytrader cancels or is hit by someone else.

Hope that helps.