TradeTrend, LagR, and Market Dynamics
TradeTrend Signals: StockCaster utilizes a variety of market dynamics or TradeTrend signals to measure movement in securities as lead indicators and has developed a series of scans to look for changes in TradeTrend and Bid/Ask proportion.
TradeTrend Indicator: This new indicator illustrates the ratio between trades executed at the Ask price, versus the quantity of shares sold at the Bid price, or as a result of sell orders being executed. The greater the TradeTrend, the more shares were traded as a result of buying. For example, a TradeTrend of 30 would signal a 30:1 ratio between buys and sells, or for every 30 shares bought by trades and executed at the Ask price, only 1 share was sold as a result of an order being triggered as a sell. TradeTrend is a unique market indicator that measures the proportion of stock traded during any given time period in order to discern the predominant trading pattern associated with the security. Changes in trading pattern can serve as an initial trend reversal signal. StockCaster monitors all transactions that occur throughout the trading day and compares each trade against the existing Bid/Ask ratio (at the time of the trade) in order to determine the proportion of trades at each level. The TradeTrend indicator is computed by dividing the total shares that were traded at the Ask price, by the total shares traded at the Bid price, in order to establish a ratio of exchange. If the TradeTrend value for the stock reflects a positive value, then it can be presumed that the majority of transactions are occurring at the Ask price, subsequently signaling that buying pressure is dominant in the market for the stock. The greater the positive number, the more buying pressure is being exerted, whereas a TradeTrend ratio that is closer to zero would signal that more shares are being exchanged based on sell orders. This would correctly be interpreted as a sell off by existing shareholders.
TradeTrend should be used in conjunction with other technical, fundamental, and historical indicators to gauge the upside or downside price potential of a security and is considered a measure of "market sentiment" toward a security. For example, a strong positive TradeTrend of 30 would indicate that 300,000 shares of the stock had been purchased at the Ask price, while only 10,000 shares were sold at the Bid price by existing shareholders. Such a condition might serve as a precursor to follow-on upside movement in the price per share of the security, as the quantity of available shares for sale evaporates in the face of overwhelming buying pressure. The converse (a TradeTrend value of O) might signal an impending market correction, if large blocks of stock are being sold at market value and the average volume of shares traded increases significantly.
LagR: LagR is a newly created indicator by StockCaster that measures the degree of correlation (or correlation coefficient) between the TradeTrend of a stock and the price per share on the subsequent time periods. StockCaster uses LagR1, LagR3, and LagR5 to highlight lagged correlations over varying time frames. The theoretical premise for this indicator suggests that buying pressure today might consequently exhaust sell orders, resulting in a high price per share during subsequent time periods. LagR measures the value of the TradeTrend indicator for the previous period and the value of the price per share for the subsequent period, over time. The LagR can be used to assess the relationship between trade dynamics and the price per share for the stock. LagR is measured on a 0 to 1 scale. The greater the LagR value, the higher the degree of correlation between TradeTrend and the price per share.
TradeTrend Scan Logic
TradeTrend Reversal: is the first scan and represents movement from a sell oriented market to a buy oriented market. This scan discloses stocks where a reversal from a very low TradeTrend ratio to a higher value occurred. TradeTrend Reversal is the first lead indicator used by StockCaster to signal a potential shift in market dynamic.
TradeTrend > 5: This is the second scan that assesses a change in market dynamics. This scan is used to disclose stocks that experience a dramatic rise in the proportion of shares purchased at the ask price and represents only those companies where a 5:1 ratio between shares sold at the Ask price versus 1 share at the Bid price is experienced. This trend can be used to anticipate a rapid evaporation of existing sell orders and dramatic buying pressure that could result in a sudden increase in the price per share.
TradeTrend > 10: Like the previous scan, this scan is designed to disclose stocks that continue to experience a dramatic increase in buying activity, which can affect the depletion of existing sell orders, thereby resulting in an advance in price per share as sell orders are depleted.
Ask Volume > 50%: The fourth scan in the series examines the proportion of the trades executed throughout the day to find those securities where the proportion of trades executed, at the Ask price > 50%, of the total shares traded. This scan takes into account not only the shares traded at the Bid and Ask prices, but also those trades executed in between the spread. Essentially, when the proportion of trades executed throughout the day occurs at the Ask price and that proportion exceeds 50% of the total volume, it suggests that market makers are not positioned (perhaps because of low inventories of stock) to trade shares in between the Bid and Ask prices. Subsequently, it can be concluded that a fair and equitable market dynamic has been achieved without interference and the market responds by executing trades at the Ask price based on demand. This can often serve as a signal of impending upside potential in the price per share as existing sell orders within the inventory are evaporated.
Bid Volume < 25%: The next scan in the category searches for instances where the proportion of trades at the Bid price drop below 25% of the total volume. Like the previous scan, this scan attempts to identify stocks where a significant decline in selling pressure has occurred.
OVol < 25%: This scan looks for instances where trading in between the Bid/Ask spread (or Other category) falls below 25%. Like the previous scan this can indicate that sell order supply has evaporated to a critical point where broker dealers are forced to execute incoming buy orders at the Best Bid price, because they lack a sufficient inventory of stock and subsequently must look for supply from other market makers.
DVol Double $Up: The final scan in the TradeTrend series looks for demonstrated market pressure and specifically searches for stocks where the total daily volume doubled compared to the previous day's trading and where the closing price was greater than the previous day's price. The purpose of this scan is to identify stocks are not only in play (as evidenced by a surge in volume) but which closed higher, thereby signaling a positive movement based on the trading.
Important: StockCaster's TradeTrend and Trade Dynamics Profiles are perhaps the single most important pieces of information in helping to correctly analyze the pressures being exerted on any given security. As expressed, TradeTrend measures the relation between buying and selling pressure, but StockCaster users are advised to closely assess the interrelation between AVol, BVol, and OVol percentages in order enhance the probability of correctly assessing the pressure being applied to any given stock. Despite a strong positive TradeTrend, and excessive proportion of OVol trading (trades in between the Bid and Ask prices) can indicate that broker-dealers are evacuating their inventories of owned shares in anticipation of a retracement. One reason for large percentages of OVol trades is due to the fact that the market maker holds a significant inventory of shares and is selling their shares below Ask price to avoid calling another market maker to facilitate the exchange. Another reason for this phenomena can be attributed to heavy short selling pressure being applied to exhaust buying activity. This similarly can signal an impending decline in the valuation of the security. StockCaster recommends that users [always] conduct a comparative analysis of the AVol, BVol, and OVol proportions (over the past 30 days) to discern the forces present in the market and to assess whether any disproportional OVol selling is occurring. You will find the 30 day Trade Dynamics Profile of any security on the Stock_Info page (above the graph) of StockCaster.
