Today, you’ll learn what technical analysis hedge funds use.
A student asked me, do hedge funds use technical analysis? How do they do it?
Hedge funds use either one or some of the following top technical indicators to make an analysis: 52-weeks high, 52-weeks low, moving average, RSI, MARSI, MACD, scientific testing, Elliot wave, support, and resistance.
Some of the top hedge funds have used a simple moving average and 52-week high to analyze a stock.
While technology has developed because of supercomputers, some of the famous traders have continued using simple technical analysis.
However, other hedge funds have moved to high-frequency trading(HFT). In the first place, why trade manually when you can use a computer to buy and sell stocks for you?
Let’s not dive into HFT because it requires a high level of computing power. But, if you want to try it, go to the Quantopian. It is a place to learn about algorithmic trading and actually apply it.
You may have thought that hedge funds have superpowers that enabled them to only create money from stocks.
However, they are just like us who use technical analysis to help them in their trading.
Well, let’s go away from the topic and talk about traders who use technical analysis. I did a lot of research because a hedge fund is mysterious.
Martin Schwartz is famous in Wall Street because he brought up his hedge fund from a $40,000 account to $20,000,000. He advocated the use of most important moving averages for technical analysis.
He revealed his trading style in this video.
Around 48 minutes in the video, he revealed about running stops and scientific testings(technical analysis).
You probably know about support and resistance where most of the stops are placed by traders.
Hedge funds can access and analyze where the stops are located in the charts. Also, they will often take the tops and bottoms to profit from small traders.
If you knew this already, always be careful where you set your stop loss. Hedge funds are brutal with running after the unsuspecting traders.
They also use scientific testing, they do it by trying to sell a big order, and if the market doesn’t react, they go the other way. They can do that because they have huge funds.
You can take advantage of this strategy by just watching the price of when there are big orders from the hedge funds.
Victor Sperandeo is the president and CEO of Alpha Financial Technologies. He has been using at least 3 indicators: Financial Trends indicator, Commodity Trends indicator, and diversified trends indicator. He has been trading since 1968.
I don’t have a lot of information about how he uses the above indicators. If you want, you can dig deeper so that you can learn how to use it.
He also uses the 1-2-3 trend change in his technical analysis. You can watch the video here for more information.
There are three things that must happen before you even consider that a trend has changed.
- Trend line must be broken
- Prices must stop making higher highs in an uptrend, or lower lows in a downtrend
- Prices must go above a previous short term minor rally high in a downtrend, or below a previous short-term minor sell-off low in an uptrend.
The three rules have a resemblance with double top and double bottoms but include a wave shape pattern before the reversal.
When the price hits the top or bottom again but cannot push through, a trend change can happen.
However, we can’t discount the fact that this can only be the bottom of Victor’s strategy. He may have other technical tools for his analysis.
Support and Resistance
Every hedge fund must have used support and resistance in their technical analysis. This is an area on the chart which they used to run after stops.
They use it in a way that differs from the retail traders. They love taking out the tops and bottoms.
In hedge fund technical analysis, you can make money daily to increase your capital.
Have you noticed why trading books always use support and resistance levels?
It’s because traders have increased interest on those levels. Also, liquidity rises in those levels.
It is a spot where money can be made or lost.
Just like the 1-2-3 trend change criteria, support and resistance have made or broke many traders.
If you don’t know how to use it then you are not using technical analysis the right way.
Here is an example of the support and resistance level:
The colored area represents the psychological levels at which trading decisions can be made. You can buy at the breakout of the resistance or sell at the break down of support.
You’ll see two types of traders in these zones. They are the bulls and bears.
The bulls buy at the breakout of resistance or pullback at the support. The bears sell at the resistance area or at the bounce.
52 – Weeks High or Low
The 52-weeks high is the highest price of the stock in the previous weeks. It is an important psychological level that attracts traders.
Some hedge fund managers use it as a momentum indicator. You probably use other technical indicators to gauge momentum.
When the price is within 20% below the 52-week high, you can say that the stock is in a strong bullish trend. Also, once the price is below 30% from the high, you can consider it as a bearish trend or in consolidation.
You may have thought that’s the only way to use 52-weeks high or low.
But, there is one secret that you probably do not know about. Are you ready?
But before that, let’s talk about the 52-week- low. It is the lowest price in the last 52 weeks.
You can use it just like 52 weeks high above but only in reverse. Instead of buying in the low, you sell.
However, contrarian traders buy when the price hits the low.
Now, here is the secret!
You can divide the 52-weeks high by the 52-weeks low. The result is a momentum indicator.
When the value is equal to two, it means that the stock has doubled from the 52-weeks low.
It signifies a strong momentum of the stock. You probably did not know this.
I know you did not learn this before.
Hedge fund uses this for momentum trading. The usual setting for this indicator is 14 days.
When the RSI hits the 70 levels, you may consider it as overbought. If the RSI is below 30, the stock is oversold.
The trader buys when the stock is oversold and sells otherwise.
But, you probably have doubted whether hedge fund uses it. Again, they don’t use it the same way retail traders like you had been.
Hedge funds like to place baits to the unsuspecting traders. You probably bought at the oversold levels because the RSI indicator had alerted a buy signal.
Did the sharks(hedge fund) trap you?
Hedge funds use different tools in technical analysis. They have advanced so much in technology and their strategies are hidden from the public.
If you want to find out what they use you can go to our recommended strategies.
Can you suggest other technical analysis hedge fund uses?
- How to tell if a stock is oversold?
- Best way to measure the volatility of a stock
- Can intraday trading be a full-time job?
- Buying stocks after ex-date