The Secret Weapons of Wall Street Traders (Darkpool and VWAP)
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Paid members, the watchlist for this week will be out tomorrow since it’s a long weekend, enjoy your vacation. For today, I decided to write up about two tools that traders on Wall Street use to trade that you may not know about.
These are DARKPOOL (for swing trading) and VWAP (for intraday trading).
DARKPOOL - an essential part of swing trading:
Darkpool trading accounts for an estimated 40% of all US trades, so these have a huge impact on the market that you need to know about.
Essentially, dark pool orders are orders that are not placed on public exchanges (aka the "lit market") so large institutional investors can buy and sell large "blocks" of stocks without impacting the public tape.
They were created first by institutional investors because there was no way for them to sell large shares of a stock on an exchange to the public, unless they waited a few days, but the price could change.
Darkpool trades do not have to define their intention to the public, so the trades are visible the next day on what's known as a consolidated tape (you can view these on websites like www.cheddarflow.com and I use www.flowalgo.com.
The darkpool tape is used because large investors are all on there, so it's much more likely there will be a privately negotiated price that a buyer or seller can find for their block of shares vs. the public market where it may be find to sell all at one price.
Usually, when you see large dark pool orders on certain stocks that means a fund is preparing for an event and will negotiate a private price to get rid of or buy shares. The effect on the stock can sometimes take days
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What's interesting is that they don't have to declare what the intention is, you just know that something happened at X price. Now sometimes you do know the intention but those orders are reported delayed so it's pretty much useless. The trade that's highlighted green was a buy trade from the day before, and then we got a gap up the next morning. So, Monday, when we get the delayed darkpool data, it will most likely be a bunch of sells which is why the intention is pretty much useless and the large trades are hidden anyways. I use darkpool to verify an upcoming move and use other information to make a thesis and go long or short.
VWAP - a key intraday trading indicator:
So how does VWAP (Volume-Weighted Average Price) fit into all of this? VWAP is an intraday tool that banks and institutions use to identify a good price for the stock, it's the average. This is how it's calculated:
Banks use this to identify when they are getting a good/bad price for a stock. The further a stock is from the VWAP (aka average), then an institution wants to bring it back closer.
Mutual funds use VWAP to get in and out of positions without marking as big of an impact on the market. A large order can bring a stock from below VWAP back to the average, and the same can be said for the opposite.
It's important to note that VWAP is not used for anything other than intraday trading as it resets every day. Here's how one could use VWAP in their trading:
Obviously no single indicator should ever be used to place a trade, but it's important to know how institutions use VWAP and Darkpools to their advantage and how these orders can affect you trading as well.
See you all for the weekly watchlist and trade ideas tomorrow. Thanks for reading!
-Adit Dayal