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Satans heartbeat

  #7 (permalink)

North Carolina
Trading Experience: Beginner
Platform: NinjaTrader, Tradestation
Favorite Futures: es
Posts: 644 since Nov 2011

I think it might be more instructive to figure out how to trade these patterns or at least to think about possible narratives that might explain them. "Satan's heartbeat" is often the result of the day trading time frame participant getting long in anticipation of new highs and price trading below their entry price. This causes many of them to exit trades and for others stops to get hit. This participant then tends to leave the market and we get a little bit of a sell off. It takes a bit of time for a new buyer to come in at the lows or for shorts to cover, as it was created by short term participants: market returns to neutral. Yes, I've been hit by it enough times even though I know why it tends to happen and to be aware of the possibility.

Satan's heartbeat may also be caused by a false breakout to the upside as hedge funds buy futures to hedge their short positions triggering technical runs. Because they were short biased, there is no buy in. This has happened a few times in recent markets: professionals try to get short pre-market while hedge funds buy futures and short the tech stocks. This pattern might also happen when small traders temporarily overrun bigger traders. It may also be a sign of increased volatility where larger traders will try to stake bigger positions off market. In general, it is a sign of increased herding behavior and higher volatility markets: greater uncertainty. Of course, these are hypothetical narratives only because we can not prove them: high level trading tends to require going beyond narrative thinking.

Last edited by tpredictor; July 4th, 2017 at 09:26 AM.
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