Accumulation play, part two
The dictionary outlines "accumulation" as:
-the acquisition or gradual gathering of something. "the accumulation of wealth"
-a mass or quantity of something that has gradually gathered or been acquired. "the accumulation of paperwork on her desk"
The process of accumulation is not a hidden secret to the majority of traders, this word gets thrown around quite frequently, whether it is in the context of trend rotation, large rallies resulting from the basing consolidations or just average term used in long term investing when someone is mentioning accumulation as a part of building long term position in the asset.
Be wary of hindsight experts who call every phase of market "accumulation" just because price has rallied from it without defining the rules of what identifies accumulation before the actual rally even results:
A large portion of traders using the word accumulation tend to only use it in hindsight, in the context of some large move that resulted after a prolonged idle phase of price which is afterwards visible on chart. And it is very easy to put a painting tablet and putting on a pro painters hat and start calling "accumulation" moves of price action in hindsight, which is what essentially tends to happen in the trading field at large scope.
The missing link that many traders have is how to create robust identification system to define accumulation or potential accumulation at the spot in the making, and repeat that process over and over again, which is where this article swipes in.
My focus in first 3 years of trading was to identify accumulations with a robust pattern which is not just a hindsight drawing or insight (as no trader can make consistency by just drawing hindsight charts), and to put as much historical research as possible to find some commonalities between what I assumed to be accumulation pattern.
This meant dissecting different variables, sorting them in different categories to see which are relevant (volume profiles, flows of highs and lows, differences in candle consistency on the front side, etc...). The main reason why so much focus was placed on accumulation is that after researching many cross-assets and markets few things become clear quickly:
-Many markets tend to be in bull phases
-If you randomly pick 10 asset classes chances are one of those assets will be in a strong bullish phase
-If you try to think like a larger trader, how would larger trader tend to absorb as much size as possible where there is a solid (front-baked) reason to do so? Filling and moving ask higher and higher, or rather filling bid, selling some ask, letting the neutral development set, to fill as much as possible over time?
-Many assets tend to consolidate and breach higher after consolidations
If those 4 core and relatively simple bullet-points are leaned on, it becomes rather obvious that there should be some sort of accumulation phase in the market being the cross-over of all the stated conditions. Obviously by no means always present, but the key was to find those few exceptions where it was.
Next research after that (this was in between 2013 primarily) was focused on specifically very strong cyclical bull markets in exotic or emerging markets (and some developed markets) such as Austrian stocks, certain housing sector equities of 2002-2007 bull run, basically, markets that are in straight-forward nonstop bull mode. And then researching the accumulations around those to spot common conditions and technical variables.
Trough extensive research and backtesting this then helped to solidify the accumulation play and clearing as well one area: Selectivity on determining what is not a potential accumulation. The major mistake that traders tend to make is they just draw very loose / sloppy trendlines or call structures "bull flags or wedges" thinking that this has some edge value, which actually if backtested properly it does not have, especially if accuracy of entry and price response is taken into picture.
There is a thin line in terms of "continuation" patterns along with the bullish trend that can be edge-extractable and those that cannot be (which is 90%). Details matter, as always.
Traditional drawing / approach methods for continuations have low performance, adopt better model instead
From my observations and extensive research of how accumulation phases of market behave, there was a clear distinction that how majority traders or chartists tend to approach continuations was not ideal. Trendlines by themselves just give too many fake moves, and basic patterns like wedges and flags are just too subjective to define and as well suffer in performance.
The better approach is to instead put the focus on consistency of symmetrical behavior, tightening between supply and demand, and using very noticeable behavior change as the trigger for entry.
Think of it this way, accumulation or distribution phases of the market are all about the pressure concept between supply and demand, so try to avoid thinking of flat lines of breakouts from highs or lows, and instead put mindset into behavioral mechanics and rotations, which will yield far better performance.
To outline the concept of tightening between supply and demand:
Below is outlined what is meant above the article on difference between using traditional trendline focused approach versus progressive behavioral approach:
Placing focus on progressive behavior and the key rotation of such behavior yields far higher accuracy of where the rallies of accumulations start as oppose to trendlines. However, for this to be valid the behavior has to be progressively symmetrical. This means for example several consistent lower highs, with somewhat similar progression in terms of number of candles, volume and wash/rally activity. If structure does not display progressive behavioral symmetry, trader should not be opinionated on it.
Example of progressive symmetrical behavior versus asymmetry:
Aditional pointers about accumulations have been raised in initial article on blog to check out.
Basic composition of structure:
1.Strong impulse bull move in front of the structure.
By strong impulse move, it is meant that the move itself is quick in terms of how quickly it is progressing higher, it has plenty of volume, and the majority of candles within the move itself are bull candles. Example of the frontside impulsive leg on momentum and proper candle conditions versus less ideal case on right:
2. Consolidation with 3 or more lower highs (the more the better, the longer the better)
3. High volume front-side:
The premise of why high volume frontside matters is the idea that high volume frontside is aggressive move triggered often by institutional or other types of a larger player, as that bidder is willing to size in by removing any offers on ask which signals that bidder has potentially strong attention or reason to do so. (Or collection of bidders).
After initial impulse leg cools down and retraces then the same (or other) bidder might come back into perspective and starting to distribute his size into pushes and accumulate back into dips as his primary reason still exists to remain to be present as a buyer on the asset. This could be either the same bidder or some other bidder might step into his shoes at that point. In certain cases, if one watches tape closely and especially goes to rewind the tape (after the fact) in some cases the same bidder can be seen behind the process, although technically that is very difficult often to spot, and is clear only in certain cases.
The concept is outlined on the example below (aggression into ask on frontside move):
Different types of demand / support levels in accumulation
Accumulation itself can be in different compositions. The demand level could be flat and clean, or it could be more asymmetric with the progression of slight lower lows. As long as lower lows are not progressing too deep relative to the impulsive bull leg it should be fine. Below are outlined different types of accumulations, some are more ideal to trade and some are less.
Steepness of progression of lows
Ideally, lows should be flat or just slightly lower than previous lows. If current low is too deep relative to previous, and such behavior continues then it is too difficult to time the entry and statistically the chances of large draw-down against the play increase before the price actually "bakes the target". Shallower accumulations thus have priority. Below is outlined the steepness/angle of progression of lows, ideal versus less ideal:
First higher high (if on volume and momentum) as key rotation indication
Ideal rotation "confirmation" is when structure places first major higher high on decent volume and momentum push.
Once the first higher high is made on key rotation level, it should be on strong momentum push and with as much volume as possible, this shows that strong bidder is willing to step up now by rotating the whole accumulation process higher and is no longer just willing to absorb at lower price levels, softly around the demand zone. Change of behavior on volume and strength is what trader should see for A grade play.
It should be noted that this condition is not always present however. It depends on what kind of structure the accumulation is setting up. If there is significant tightening towards right side it is unlikely that strong volume HH will be present to initiate rotation.
Example of accumulation where large bidder initiates rotation by removing large offer at the key rotation location, and the accumulation starts to bake a rally:
Example above shows overlap of first major higher high inside structure+large offer removed at key rotational point, creating nice infliction point.
Hidden buyer (delta volume)
In many cases if one checks the tape / Level 2 on accumulation, there won't be any noticeable large buyer present on bid. MM will smartly distribute his bids over time without displaying size (or multiple larger buyers). What usually tells the story is delta volume itself, basically, delta on selling might be deep in red trough entire structure, but the lows of the structure are holding well, showing that hidden buyer has been absorbing, or just smartly placing the size on bid over time without drawing too much attention.
Delta volume will help displaying absorption activity in certain cases, but statistically it is less than 20% cases where the delta will stand out and delivering some useful information. (Role of delta indicator has been explained on other blog article).
Ideally delta should display lots of selling into bid (delta is red and droping) but the price is not creating lower lows, as it shows large player(s) is placing a bucket under the price to absorb.
A trader with good tape reading skills might notice that from Level 2 itself, while for those who keep an eye across many assets at once it might be a better idea to combine the use of volume delta indicators to keep this information "baked and visible historically" into the chart and be visible in hindsight as well (if the trader had eyes elsewhere).
Example of where delta showed absorption into the bid during the accumulation process:
Target projection (1:1 structural target or more)
The basics behind the target projections on accumulations is the liquidity of short-sellers and accumulated longs and the depth of exchange between sellers and buyers within the structure to project the potential likely target.
Meaning that some of the squeezes, once the move starts, will be pushed by short covers from short sellers that participated in structure but need now to exit, some from liquidity gap of buyers that sold into sellers inside accumulation which gives now price easier lift to progress higher, as many sellers were gotten rid of, and the rest is about the dynamics of highs/lows and how the trends tend to move in waves.
All combined creates some sort of target approximation to where the accumulation moves tend to go on average, which is additionally backed by very extensive research of data on my part of countless of plays, where the data points the minimum target that trader should seek on accumulation play is 1:1 structural depth replication as a projected target. 1:1 being the minimum and it could be anything higher than that, depending on external conditions on the asset (catalysts, short % exposure, strenght of overall market....).
By 1:1 structural depth, it is meant that the trader should measure the distance between highest high and lowest low inside the structure of accumulation and then this target should be projected upwards from the area where the accumulation enters into the "play" trigger (rotation confirmation). The measuring example is shown in the conceptual case below:
As noted above 1:1 is the minimum target, taking a position out before that should not happen (unless there is heavy seller present on tape), since it goes against the statistical performance over a large sample base of accumulations.
However, it is valid to expand target beyond 1:1 projection, towards 1:2 or 1:3 if certain conditions are met, such as:
-Asset has fresh bullish catalyst (reason to run further)
-Asset is in very strong bull market / trend (reason for trend to pick up again and move higher)
-Tape / Level 2 on asset is displaying large bidder participating (large bidders should be visible on tape once he starts unloading giving trader clear indication on aproximate how much volume should go trough tape to consider this strong buyer to be exiting)
-Tape / Level 2 shows large offers are eaten very quickly and easily, showing aggression of buyers (large obstacle removed, opening the flood-gates for higher)
-Orderbook has displayed over time that large bidder has accumulated large position size and to unload the size he should be very visible in the volume print, until he does it
If the right conditions are present on the asset the targets can be adjusted, however, this is where the difficulties begin as this is where most traders start to ask questions. What does qualify as a strong bullish catalyst? What does qualify as a strong bullish trend versus only a mild one? How do I get a read on tape to spot the larger buyer?
Those kinds of questions require experience to sort through and there are absolutely no shortcuts to get quick answers. No matter how many books, videos, lessons, the experience will be needed to go through case by case basis to observe such clues. Give it time and be patient, it is very important to write and note things down that are worthy to remember from previous cases, as those examples might repeat.
And in case if one is confused to determine if what is being observed is important/strong or not, always remember, the focus should be on external variables in extremes, the variables that really do stand out in their strength. Exclude everything else that is only so-so or more murky.
If one is unable to sort the meaning it is likely that the variable itself is not strong enough to put attention to it, which actually will be the case, for the majority of situations and should not come to surprise. Which is why my view has always been and will remain the same:
For consistency and performance one needs strong selectivity and patience combined with a large framework of assets so that selectivity has the ability to shine through. If one just trades the same single asset every day, selectivity is by itself blurred out as trader is forced to "put at least something on the table - in play".
But remember, as a trader you should always scale out position/winner in chunks, never to anticipate that ideal target to be "the it". If target on accumulation is extended make sure to take partials on the way up before that final projected target is reached. There is no excuse for trade coming just increments before your TP to turn away right there and for a trader to complain, this is an issue that has a relatively easy solution!
Example of scaling out accumulation play in chunks, if the projected target is 1:2 of structural depth:
Shelf at the key rotation level
Microshelves have been outlined on the blog with some previous articles already, it is the concept where the supply and demand come very closely together usually being the result of large player unloading or accumulating position at a very specific price level. The price tightens into a tiny shelf, which could be the size of bid/ask spread or wider, depending on the liquidity and spreads on the asset.
Ideally, the accumulation would have micro shelf right at the key rotation level, where the large bidder steps up and absorbs all the remaining supply at the shelf level, this is where a trader can join the long side with tighter risk and wider RR on a potential trade, risking just under the micro shelf lows.
Example of such accumulation rotation with shelf at key rotation level on XRP / ripple.
Another example of accumulation with smaller and less expressive shelf, but non the less on ONT coin:
Not all accumulations will have shelves present, but those that do offer better opportunities.
Entry approach (personal suggestion only)
As noted many times before, entry approaches are only my suggestions, and they as well align well with my personality but they might not be the right answer for any other trader. This means it is always better for a trader to research and seek if a potential adjusted entry approach could be found for accumulation, which would perform over a large sample base of plays, suiting better to this specific traders' personality. There are no black and white right and wrong answers in trading, many rules in trading can be bent if the right welding tools are used and the edge over the long run is not damaged.
1.Long small ahead of potential rotation at demand level.
2.Long 70% size at rotation confirmation.
3.Additional bounce entry on a retest
Risk control / approach (personal suggestion only)
As noted for profit taking which is my personal suggestion so is the risk approach, however, there is a bit of difference. The risk is heavily guided by statistical data, meaning that there is very little room in terms of how traders can actually adjust my own approach. There are certain things that for example can be adjusted and others that cannot be simply because the data and behavior of accumulation does not allow so.
Let's take the two most common behavioral guides of how a winning/performing accumulation play usually pans out:
This means that if retrace gets any deeper than 50% it usually tends to fail, which means that this 50% distance should be maximum stop distance that trader should be using on stop loss.
Majority of traders tend to put stops under lows, however the data says that in accumulations it is better to set stop at the mid / half distance, which tightens the risk and follows data better actually.
Example of too wide risk usage on accumulations (and better-suggested method):
However, if the trader is unsure where exactly to set risk it is always better to just scale-out in chunks as the price goes against trader rather than exit in full one sized exit. This way the trader keeps reducing the size if price moves against him until the maximum risk level hits and trader takes the remaining size off fully.
Mind that the suggested "better" method (in regards to placing max stop) is not my subjective opinion pulled out of nowhere, it is based on large amounts of data and research!
What can be adjusted in regards to risk adjustment?
Several things can be adjusted, such as where trader scales into position and how the cutting of position is performed if the price is nearing the invalidation level. As well as potentially adding to position size if the price gets close to invalidation level to put a better average of entry on the overall position.
There are plenty of such dynamic factors that can be adjusted and this is up to the trader to test and figure out, ideally in the simulated trading account before applying it to live capital.
Another thing to mention is that bounce play often sets up from successful push after accumulation. The bounce is initiated from the key rotational level as long as the price does not pass 1:1 structural target before it retests it. If 1:1 distance is passed the chances of bounce decrease as that same bidder/s are less likely to still be in play.
A conceptual example of bounce from rotational level:
Example of bounce case for ticker V, where rotation level gave few bounces before fully rotating higher:
Another such example of clean bounce from key rotation level is on EURJPY:
Ideal case of accumulation
Ideal instruments and market conditions
For accumulation, there is one thing to note straight away. The majority of A-grade plays will develop in highly liquid conditions, where the asset trades at very high relative volume (RVOL) - relative to what it trades on other days usually. And as well there will be a presence of some sort of catalyst to support the reason why the bidders are participating. Additionally to that, another variable to note is the strength of liquidity relative to spread size, majority of A plays will be on assets where the large bidder can stay hidden in liquidity and can press at the right moment when needed to, and for that tight spreads are needed, relative to the structure size. An example of tight spread is if the structural depth of last high and low is 10 units, the spread should not exceed 1 unit size.
The wider the spread the worse it is, not just due to the perspective of how large player is less likely to accumulate bigger size under such conditions but also it prevents the trader from filling at ideal entry prices or to extract larger RR from the play.
Mind that wide spreads by default decrease RR on your trade, especially if the distance between bid and ask is very wide relative to the size of the structure and is static (does not move closer together and expand asymmetrically) which is often indication of poor liquidity. For trades above 5R tight spreads are a necessity for the majority of cases.
Certain assets trade in tight liquidity conditions trough entire day or almost every week on daily basis, while other assets are a lot more dynamic and catalyst dependent to determine when the liquidity will pour into an asset, which means that certain assets are by default more ideal to keep attention to for accumulations, such as:
Main FX currency pairs: EURUSD, GBPUSD, XAUUSD, USDJPY.
Main large-cap equities (with tight spreads): MSFT, AMD, XOM...
Main crypto pairs (when in bull market especially): BTCUSD, ETHUSD, XRPUSD, BCHUSD.
The market cap of the asset itself does not determine if the asset is ideal for accumulations or to have tight spreads. One such example is ticker NFLX which is a high cap company, but the ticker itself tends to often trade in wide spreads and thinly positioned order flow (relative to market capsize) which makes it less ideal to trade usually.
My usual preference and filter which works well in FX markets are to only trade accumulations when there is strong fresh catalyst present for a specific currency, there needs to be a reason to create liquidity and intent on ticker which tightens spreads and creates opportunities for large players to get involved, which is essentially what trader wants to see.
When it comes to equities the filters for "involvement" are softer, because often the flows into equities / SPY will be more frequent without strong catalysts present, creating decent opportunities in large caps. The same is somewhat true for crypto as well.
One of the key variables to look for a strong rally from accumulation is time component, this must not be under-estimated. The longer the accumulation period lasts, the more sellers are absorbed the more likely it is that large breach might come after that. Time is obviously a relative concept, meaning that it is not the minutes or hours itself that matter in general, but instead minutes or hours within the context of structure.
For example, for 1 Minute chart structure, decent accumulation might last 1 hour, while ideal accumulation might last 10 hours or more.
While for H1 structural accumulation a minimum accumulation period might be at least 2 days, and the ideal would be 2 or more weeks.
But it should be pointed out that the majority of accumulations have 5 lows/highs within the structure and that longer accumulations than that are much rarer. 5 lows and highs inside structure then scale with time on no matter which time frame one is looking at the structural composition from.
Example of how time affects the grade of accumulation:
But also keep in mind, time is isolated variable in this case, just because structure consolidates for a while it does not qualify it an A grade by default, it only contributes to A-grade quality among the other variables. Think of it like stacking right variables on top of each other:
High short interest+long established accumulation over whole day+strong bullish catalyst+strong bidder present on tape+tightening of sup/dem+microshelf+all eyes on this ticker+very strong volume frontside+etc = alright this seems to be clicking in my way.
Short interest on ticker:
Another component worth keeping eye on is short interest on the traded ticker. This especially applies to equities where short data can be collected or assets/markets such as futures which are very liquid and have a default presence of shorts. Usually, the extremes are what matters, meaning if short interest numbers are relatively low it should not play the role in the thesis of trader, however, if numbers are in extremes high enough it could provide stronger conviction on a long trade, in the expectation that squeeze might be stronger from accumulation as the short sellers are forced into covering, contributing to squeeze. One mistake that traders tend to make is that they overload themselves with all sorts of meaningless data which is not at extreme levels. They might include short interest into thesis where the ticker only has 5% of short exposure, this is easy way to clog your perception with useless data. As noted above, focus should be on extremes, if data is at extreme level include it in thesis, else disregard it.
My personal view on the short data to focus on is above 30%+ of short float when it comes to equities. The higher the short float the better, ideally when it starts to play a noticeable role is when short interest is 40% or higher of the whole float. Or the other case if the asset is in futures markets then it could also qualify as worthy, even if short data is not reported.
As noted in previous articles shortsqueeze.com has decent reports on short data for equities, a more freshly updated is also Ortex.com at some monthly subscription cost. I would highly discourage anyone from using finviz.com for short data reports (which many traders tend to use) since their reports are outdated. If a short report is outdated, it is not just useless but rather highly misleading which is even worse! It's like operating with a malfunctioning compass, which is worse than not using a compass at all.
For short data, there are also COT reports and some other futures reports outside of equity markets but those tend to be less useful for daytraders since they are updated very un-frequently.
One such example of the highly shorted ticker is BYND, where it set accumulation on that day when the short float was relatively high (short float on the ticker on the day was 50%, basically half of the float was short):
Another example of highly shorted ticker on the day with accumulation was ticker TLRY:
The useful rule when it comes to highly shorted names is, the longer the accumulation lasts the better. The longer it develops the more short sellers are likely to participate the higher the chance of squeeze, especially if the ticker is under SSR and short sellers cannot hit the bid.
The useful rule that trader can implement is to make notations on the chart:
-1 hour of structural consolidation marks the chart with B grade potential for a squeeze.
-3 hours of consolidation mark the chart with B+ for a potential squeeze.
-Anything more than 5 hours, mark it as A, just to keep this information on the chart for the reminder.
EOD short squeezes
As the equity markets come towards last 2 hours, the chances of forced short covers increase (brokers calling their shares back in some cases) or just generally short sellers might be more willing to cover as they have expensive overnight fees and liquidity issues in AH /PM hours to exit, which all contributes to potential short squeeze chances in last two hours before the market close (14:00 - 16:00 NY time). This should place trader on notice if accumulation is turning to be in play to put higher grade on such play.
Such example on ticker SHOP:
Focus on bull markets / assets
The straight-forward rule is to keep the focus on the bullish market, to increase the chances of accumulation to appear. There is a significant statistical gap of accumulations to appear between the bullish or bearish market, in a bullish market the chances are far higher, which should not come as surprise.
Ideally one combines a higher macro perspective with the micro to gather best RR opportunities, often macro accumulations will give an overlapping micro accumulation on a lower time frame with a combination of tape and volume support. This allows the trader to execute on the micro with the setting risk of the micro while targeting the push that would essentially complete the macro target (risk of micro 1X, target of macro 5-10X).
To find such plays trader needs to be "watchlist oriented". Meaning doing homework is needed to find such opportunities across a large sample set of global assets and then putting the focus on the asset needed. Doing scans of equity assets on H1 time frame, or FX or crypto assets is my usual procedure, and once the trader develops an eye for it, it does not take much to complete a full cross-market scan (10-15 minutes).
A conceptual example of combo play:
Some examples of combo plays have already been provided in the initial blog article about accumulations.
The example below is not necessarily macro and micro combo, but instead double micros stacked on top of each other back-to-back, those also provide nice opportunity to add to the size and to maximize the R units on the play, ticker GPMT:
Examples of accumulations:
A grade accumulation play
All variables for A grade play have been explained above on article (as well as on first original article). Remember, the more "right" variables that stack together, the higher the grade of play. The more exaggerated each variable is and the more they are stacked in ideal circumstances and conditions the better. An example of "exaggerated" variables for A grade play would be:
-Volume as high as possible on frontside of the move (on impulse leg)
-Frontside move with as big candles as possible (relative to what asset trades usually)
-As many lower highs in consolidation as possible (each high should be lower than previous).
-Bull legs should be as strong as possible in consolidation while bear legs should be weaker / softer
-As much volume as possible on bull legs in consolidation and as little volume as possible on bare legs (unless the delta shows absorptions)
-Tightening of structure towards later part (right) where demand starts to press as closely into supply as possible.
-The first higher high should be on a strong push as possible with as much volume as possible, showing an indication that aggressive bidder is now willing to take the asset into the rally.
-The longer the accumulation / consolidation period lasts the better
Such A grade accumulation example fitting variables above quite good (crypto, THETA/USD):
Caution on gathering the samples before making the conclusions
The examples shown in the article are mostly performant samples for the sake of easier explanations and to get the idea across, but by no means is that the default performance across 100 or 1000 samples. Every trader needs to gather sample base on his/her own before making conclusions on how to approach the play, and why the explanations given on article make sense. And no trader should trust the article itself, but collecting the data should be a priority to confirm if what mentioned holds true or not.
Remember, never trust any theory in trading on its face value, there is an enormous amount of absolutely misleading oversimplified content around trading out there. Make sure whatever you read or learn- to always confirm or disprove it by data and as well by giving it some chance over 100 samples in live markets to see if it does play out along what the suggestions say.
Gather those samples.
Accumulation is one of the most frequent plays in my personal playbook out of all the examples, it is present in literally every market, and the more global assets that one wields the higher chance for something to be in play. The most frequent and best assets to focus are the one in cyclical bullish trends, such as crypto when it gets hyped up as that is the breeding ground for accumulations, or large-cap equities when they catch very strong momentum and the VXX (volatility index) hits fresh lows, or the cases in FX markets where the certain currency has a major shift in central banking policy and begins a major rally, which is also ideal ground (although technically happens rather rarely, Brexit flip-flopping or SNB peg-removal were two such cases recently).
Accumulations can as well be traded on macro time frames such as Daily across many global markets, as long as a trader really is picking "hot" assets under the right cyclical conditions. In my view a great play for any trader to put into the use.
Suggestion for anyone willing to place accumulation into active use is to do as much research on historical charts as possible before you dive into seeking to find accumulations on live markets. Traders priority should be to train eye first and to do that it is best done on as many miles of historical charts as possible, as mentioned before on bullish markets if possible, or assets under current short-term bullish conditions, to decrease wasting time on bearish trends of historical assets where accumulations by default have far lower statistical chance to appear.