Friday, April 06, 2007

Block Trade Signals


How do you know if the block trades you see are buying or selling?



I asked myself the same question when I first started filtering for these block trades. I honestly don't don't if the traders initiating these trades are buying or selling, but we both know that if someone is buying then someone else is on the other side of the trade, and that person is selling. I asked myself, if I was a professional trader would I have bought 200,000+ shares of SPY at the market near the high of the day at a NYSE TICK high? Doesn't sound very smart to be buying at the top now does it, especially when that single trade is valued at over 28+million dollars worth of equity. The important thing to notice on these block trades is the current volatility of the markets and the type of trading day it is, whether the market is bracketed or breaking out and trending. Ask yourself the question, do you expect to see breakouts during the afternoon dulldrums when the majority of the time there is no news to act as a catalyst to drive the market higher? If your seeing block trades during the dulldrums on tick extremes, the majority of the time I see these block trades are being faded.

If your using quotetracker and want to filter for block trades the data must be collected in realtime through Interactive brokers. These high volume block trades cannot be backfilled through IB, and the block trades will only be stored in quotetracker's memory for 3 days max. To get the block trades filtered using Quotetracker I use 1-2 tick charts with a paintbar indicator that will show me when the bar volume is over a certain number of shares, such as 200,000 shares for SPY. Filtering out these block trades tells you where the professional money is entering at. Right now the latest software traders are using is MarketDelta, which shows you where the volume is traded when compared to price. My method works in a similiar fashion, but only shows where the professional money is entering at in the form of block trades, which is the most important thing. Marketdelta also has filters for there charts that will allow you to see only trades over a certain amount similiar to what I'm doing. I like my tick charts because I'm able to pinpoint exactly where the trade occured with red dots (or whatever color I choose) and the tick charts provide good detail. I do use 3min charts as my secondary time frame for the futures contracts I trade to get a clearer picture of the trend.

Chart Examples:

Bracketed Day-
Here are comparison charts between SPY, NYSE TICK, and NYSE A/D. (block trades on SPY are 200k+ shares). This was a bracketed day where the high was faded and the lows were bought. Notice how the tick extremes correspond to block trades seen in SPY, and how NYSE A/D showed bullishness when compared to SPY at point #4. For the most part NYSE A/D would have kept you on the right side of the trade. (I use pointer tracking when comparing my charts while doing my research, and it is a must have if you are a serious trader wanting to learn)



Trend day-
Here are comparison charts of ER2, IWM, NYSE TICK, NYSE A/D (ER2 block trades 100+ contracts, IWM block trades 100K+ shares). This was an unexpected trend day brought on with a buy program around 12pm EST and also from news from DiamlerChrysler that helped move the market higher in the afternoon. Also we saw selling around 3pm EST, probably due to traders closing out there long positions before the 3 day holiday weekend. Right around 3pm there was a pop in the VIX, probably from option traders hedging there downside risk with put options before the holiday weekend. NYSE A/D again would have kept you in the trend for most of the day. Notice how the tick lows showed block trade buying on IWM for the majority of the day and then we started seeing block trades fading tick highs on ER2 during the afternoon.

4 comments:

Jeff on 7:27 PM said...

This is a fascinating idea!
I wonder what would you think about applying that filter (or highlight) to the Time and Sales (raw data), since you are watching it anyway?

High Probability Trader on 2:36 PM said...

I don't need to highlight the block trades because I have an audible alert that tells me when a block trade has passed.

Jeff on 6:41 PM said...

I see. that's the advantage of using paintbars over the T&S. Great Idea. Thanks!

alankar on 7:43 AM said...

Is it possible to share the paintbars ?

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