Using Fakes, Fades,
Squats and Greens in Stock Trading
by Phil Seyer

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In my stock trading work, I am identifying four types of trading sessions identified by Bill Williams in his book Trading Chaos. He calls them Fakes, Fades, Squats, and Greens.

Fakes. A fake happens when price moves more efficiently in relation to volume, but volume has actually decreased. The idea of a fake is that floor traders are moving the price just enough to cause stop losses of off-floor traders to be hit. This then sparks further movement for a while. But since there is no true volume behind the price action, the price eventually reverses.

Fades. A fade happens when price moves less efficiently in relation to volume and volume decreases. The market is bored. When a fade session occurs, price will often move in the opposite direction.

Squat. A squat happens when volume increases from the previous session, but price moves less efficiently in relation to volume. It as if the stock is squatting (like a runner) and getting ready to move. The idea is that the movement after the squat gives us a clue to future to direction.

Greens. A green session is one in which volume increases and price movement efficiency also increases. More activity is occuring and the price is moving more efficiently.

By now you may be interested in these four types of sessions and wondering how one might measure price movement efficiency. William's called his measurement of this efficient the "market facilitation index" (MFI). The formula for this is simple:

Total Price Range/Volume

Total Price Range for a session is simply the high price of the session minus the low price.

So if a stock moves 5 points in a session and the volume is 1,000,000 shares, the MFI index would be 5/1000000 or 0.000005.

This MFI value is thought to be a measure of the how easily the price moves with respect to the volume that it took to move it.

MFI by itself is not too useful, but when you combine MFI with volume, you can identify the four kinds of sessions I described earlier: fakes, fades, squats and greens. Here is a summary:

When my system see a fade, a buy signal is generated when:

1. The previous candle was a fade which closed below the lower Bollinger Band, and
2. The current candle is hollow and has closed up above the lower Bollinger Band.

Here's an example from a 5 minute chart of Applied Materials. Each "candle" on this chart represents a 5 minute period.

Using Metastock, I am able to calculate when a fade happens and color the candle blue for easy identifcation. Notice that a fade happened and that the candle closed below the lower Bollinger Band.

When the next candle closed back above the Bollinger, my system generated a buy signal.

The blue arrow you see was placed on the chart automatically by my "Extreme Candles" a program I wrote that runs under Metastock. Notice how the price moved up nicely after the fade below the lower Bollinger Band. In the chart above, you will also notice some "Greens," fakes (red candles) and a squat (magenta). My strategy is to study the interaction of Bollinger Bands, Price Level and Session type to see what generalizations I can come up with. So far, the buy signal shown above seems fairly reliable. I plan to do more research. At a later date I will report the winning rate for this signal on various stocks in various time frames.

If you'd like the explore Bill William's ideas in more detail you may want to consider getting his book Trading Chaos.