Have you ever faced the challenge of mastering a difficult skill? Have you found yourself investing countless hours and immense effort into the process? Reflecting on such journeys, you'll notice a common progression through various stages. From the initial immersion to the steady middle and finally, to the culmination of your efforts, these stages often mirror each other's experiences.

In the beginning, you gather as much information as possible, seeking to build a solid foundation. Next, you organize this information, placing it into a context that makes sense to you. Then comes the crucial phase of filtering out the irrelevant details, honing in on what truly matters. Finally, you experiment, integrating new knowledge and making connections, continually refining your understanding through a cycle of trial and error.

This article examines the third stage of this process, a pivotal point where you cannot afford to discard any information and must discern what is essential. This is particularly relevant for traders dealing with small-cap equities. Let's explore this crucial phase in detail.

Key variables in a trading framework

Before entering a trade, it is crucial to establish a mental framework that allows you to predict and anticipate potential price movements. This framework consists of several key variables: the float, the volume, the time, and the price. The behavior of the equity — its range, volatility, and the speed of its price movements — depends on these variables. Let's explore each of these elements in detail.

The float

The float refers to the number of shares available for purchase and sale by the investing and trading public. When a company is formed, it announces the total authorized shares, which includes both outstanding shares and restricted shares. By subtracting the restricted shares from the outstanding shares, you arrive at the float. It's worth noting that different platforms may report slightly different figures for the float.* Minor discrepancies are generally inconsequential. However, significant differences warrant a closer examination of the company's filings to determine the correct number of outstanding shares and to subtract the shares held by insiders.

Generally, there exists an inverse correlation between a stock’s float and its price volatility. In essence, a lower float often implies a heightened likelihood of broader price ranges and more rapid, aggressive movements. This relationship is depicted in the graphs below, illustrating the inverse correlation between float and volatility.

Initially, I plotted only the red graph, but soon realized this might mislead some into interpreting the individual data points too precisely. For instance, a 20M float showing a 12% price volatility could lead to the argument that higher floats had higher volatility in past financial markets. To mitigate this, I introduced the dashed blue line. This addition underscores the dynamic nature of the correlation, illustrating that volatility is influenced not only by float size but also by various factors such as market cycles and catalysts like positive earnings reports or 'groundbreaking' innovations. Thus, while the relationship between float size and stock price volatility is fluid and subject to adjustment, the overall trend remains evident.

The market capitalization of companies is often categorized by size, offering a framework for understanding their characteristics. Unlike market capitalization ?, there isn't a universally consistent categorization of equities based on their float size. Consequently, the classification of different float sizes may vary slightly among traders. This categorization holds particular significance for me, as it shapes my perception of stocks' liquidity, price range, and volatility. Below, you will find tables that outline the general market capitalization sizes, ranging from nano cap to mega cap, alongside my personal classification of float sizes, from nano float to mid float. I have not included float sizes larger than mid floats, as stocks with larger floats do not significantly impact my trading strategies. In my experience, the float size is more critical when dealing with smaller to mid-sized stocks, where it can greatly influence price movements and volatility. For large-cap stocks, other factors take precedence in my trading decisions.

Below, you will find a 3D Environment Canvas that I have created. You can zoom in and out, as well as move the camera, by left-clicking, holding, and dragging the cursor. I hope this interactive widget brings the topic to life, making it more tangible and engaging.

In this canvas, you will see three differently sized boxes, each labeled to reflect its size. The green box labeled "10M" is ten times larger than the red box labeled "1M," and the yellow box labeled "50M" is five times larger than the green box. Click on either the boxes or their labels and observe how the boxes move. Pay close attention to the damping effect at the end of their motion, and notice how far they rebound before settling back. Enjoy exploring this interactive experience for a few moments!

While the float does not directly affect the calculation of market capitalization, it can influence the stock price, which in turn impacts the market cap. A significant retail trader, a group of retail traders, or an institution can manipulate the stock price by locking up a portion of the freely tradable float. You can't verify if a part of the float has been locked by consulting third-party sources.

I assume these traders adopt a systematic approach in choosing which stocks to manipulate. The criteria might include the 'right' float range, their accumulation ratio (float locking) relative to the float, and the stock price. The float should neither be too small nor too large. A small float, when partially locked, becomes even smaller, leading to excessive volatility that might deter retail traders. Conversely, a float that is too large would be difficult to influence significantly. The accumulation ratio must also be carefully balanced. If too small, traders have less control over supply and demand. If too large, the remaining free float becomes overly volatile, again discouraging average retail traders. These traders might use a specific formula or prefer certain values based on past success. If I were to choose, I would consider a float of 3M - 8M, an accumulation ratio of 50%-70%, and a stock price range of $1 - $4. However, this is speculative and cannot be proven with certainty.

Selecting a 50% - 70% float locking ratio allows sufficient control over supply and demand without overwhelming influence from retail traders. For example, locking 3M shares of a 5M float stock balances control and volatility. Lower stock prices require less capital to accumulate the float, making risk management easier and allowing risk distribution across multiple accounts in a group setting. Consider a stock priced at $1. Ten accounts could accumulate 300k shares each. Retail traders might believe they are trading a 5M float stock, unaware that 3M shares are locked, effectively reducing the tradable float to 2M and altering volatility expectations. The float rotates faster than retail traders anticipate, attracting more traders emotionally as they witness rapid turnover. High float rotation can lead to unpredictable stock prices and extreme price swings. Thus, traders should be aware of float rotation when dealing with small float stocks and recognize when a stock's movement does not align with its float, indicating possible float locking.

Companies may also pay groups of retail traders to manipulate stock prices higher, attracting other retail traders to buy. The manipulation technique involves splitting the float into locked and freely tradable portions, stealthily accumulating shares, and creating hype and momentum through chat rooms and social media. They may spread rumors or release news to trigger technical indicators, such as breaking resistance levels, attracting technical retail traders. The resulting rapid price increase induces FOMO ? among retail traders, who buy emotionally. Manipulators then gradually sell their shares, maintaining the illusion of a continuing rally. Once the price reaches a significant high, they dump large quantities of shares, causing the price to plummet. This method is reminiscent of the 7-step pennystocking framework by Timothy Sykes, which visualizes how emotional responses shape chart patterns.

In nature, you can observe how animals use techniques to hunt their prey. One of my favorite animals is the orca, or killer whale. In the video below, you can watch how they break the ice with subsurface waves, creating smaller pieces and generating bubbles to disorient their prey, such as seals. I love watching animal documentaries, especially those focusing on hunting and survival techniques. When I saw this video, it reminded me to the float manipulation technique, where the float is broken into a smaller piece and 'bubbles' are created to disorient retail traders.

The volume

Volume stands as a vital indicator for predicting price movements in the stock market. Its significance cannot be overstated, and while entire books could be devoted to its intricacies, I aim to offer a distilled yet comprehensive overview. The task of selecting which aspects to cover was daunting, given the vastness of the topic. However, this article aims to provide a clear and concise understanding, offering a glimpse into the complexities that underlie volume analysis.

Volume can be examined independently or as a complementary tool to price action analysis. Every proficient trader I know keeps volume charts alongside price candlesticks. Volume is a universal metric, utilized across all markets — stocks, futures, options, commodities, and even forex. Mastering the interpretation of volume and its interplay with price action, governed by the laws of demand and supply, equips one with the ability to navigate any market. These fundamental laws are ubiquitous, explaining the recurring patterns seen in different trading arenas.

Charles Dow’s theory is indispensable for anyone serious about trading. He introduced the concept of volume-price confirmation and anomalies. According to Dow, a price move backed by rising volume is considered valid. Conversely, a price move on low volume is deemed an anomaly, indicating underlying issues. Comparing volume candles with price candles in terms of their size and length is beneficial. Ideally, the largest price candle should align with the largest volume candle, reflecting the strength of the move. This idea resonates with Richard Wyckoff’s “law of cause and effect,” which asserts that the magnitude of the effect is proportional to the cause. Thus, significant causes yield substantial effects, while minor causes result in minor effects.

Despite the opacity often associated with stock markets, due to factors like high-frequency trading algorithms, insider trading, and dilution, volume remains a transparent metric. Volume data, including the number of shares traded and their prices, is accessible to all. This visibility allows traders to identify historical demand and supply zones, revealing where the market has accumulated or distributed shares.

A distinction exists between small-cap and large-cap stocks. Large-cap stocks generally exhibit high, consistent volume and liquidity. In contrast, small-cap stocks often experience sporadic volume spikes triggered by catalysts such as favorable news, unexpectedly good earnings reports, or groundbreaking technological advancements. While such catalysts also affect large-cap stocks, the key difference lies in the pre-existing high volume in large caps before the catalyst event. Small caps typically show little liquidity beforehand. Traders like Pradeep Bonde focus on these momentum bursts and episodic pivot plays driven by positive catalysts.

In stock trading, understanding liquidity traps, clearing house buy-ins, and the dynamics of short selling is crucial for grasping market behavior and stability. A liquidity trap occurs when an asset becomes difficult to trade without significantly impacting its price, often due to a lack of willing buyers or sellers. This can lead to rapid price movements if a large number of shares are suddenly traded. Clearing houses ensure smooth trade settlements. A buy-in happens when a seller fails to deliver sold shares by the settlement date, prompting the clearing house to purchase the necessary shares to fulfill the buyer's order. Failures to deliver (FTDs) occur when a seller cannot provide the security by the settlement date, which can result from logistical issues or intentional short selling without securing the shares. Persistent FTDs attract regulatory scrutiny and potential penalties. To address FTDs, clearing houses initiate buy-ins to ensure buyers receive their shares. Short sellers can become trapped when they cannot close their positions due to a lack of available shares or rising prices, leading to a short squeeze. This forces short sellers to buy back shares to cover their positions, further driving up the price. In a liquidity trap, the scarcity of shares exacerbates this issue, potentially leading to forced buy-ins by clearing houses. Frequent FTDs signal a shortage of available shares, creating a liquidity trap that complicates trading without causing significant price movements. Short sellers contribute to FTDs when they cannot deliver shares, prompting clearing houses to conduct buy-ins. During a short squeeze, rising prices force short sellers to cover their positions, leading to more FTDs and additional buy-ins. This cycle of FTDs, buy-ins, and liquidity issues results in extreme price volatility and market instability.

On the first day of a news or catalyst release, stocks can be subject to manipulation. To navigate this, I estimate the volume likely to be transacted by the end of the day to calculate the float rotation. This helps guide my decisions compared to the expected volume. Recognizing volume soaking at key levels is also crucial, especially when moves get repeatedly soaked. Observing manipulation when highs or lows are cleared out, stuffed, and soaked again at higher prices is essential.
Tradethematrix has categorized rigged stocks and their manipulation into four types, offering valuable insights for any trader.

In conclusion, understanding and analyzing volume is essential for successful trading. By grasping the interplay of various market dynamics and employing practical strategies, traders can navigate the complexities of the stock market with greater confidence and insight.

The time

The concept of time, when added to the variables of volume and price, transforms a chart into a three-dimensional representation. For me, studying time in this context is both the most exhilarating and the most challenging aspect. Like with the volume chapter, I found it necessary to be selective to maintain the focus of this article.

Time, one of the seven SI base units *, is universally experienced. Everyone has 24 hours a day and seven days a week, moving at a constant pace. Yet, our perception of time can vary significantly depending on our emotions and circumstances. When entertained or challenged, time may seem to fly, while in moments of boredom or distress, it can drag interminably.

In trading, we utilize various timeframes on charts, ranging from short to long resolutions. Commonly, traders refer to 1-minute, 5-minute, 15-minute, 30-minute, 60-minute, daily, weekly, and monthly timeframes. Larger timeframes provide a broader perspective, revealing overall trends and critical support and resistance areas. Smaller timeframes are used to implement detailed analyses derived from these broader views. However, shorter timeframes have a higher noise-to-signal ratio, making it easy to be misled without the context of longer timeframes.

Experienced traders have witnessed and navigated multiple market cycles. Ralph Nelson Elliott's wave theory, which posits that markets move in patterns of five and three waves within a trend, underscores the cyclical nature of market psychology, swinging between optimism and pessimism. Elliott's theory, incorporating the Fibonacci sequence and the golden ratio, describes these waves as fractal and multi-periodic.

Understanding the interplay between large-cap and small-cap cycles is crucial. Large-cap cycles influence and often precede small-cap cycles, with money flowing from more stable assets to riskier, more volatile ones. A weak large-cap cycle typically leads to a subdued small-cap environment, as investors withdraw funds or refrain from investing in riskier assets. Conversely, a robust large-cap market often signals a forthcoming surge in small-cap activity, albeit with a time lag. Multiple small-cap cycles can occur within a single large-cap cycle.
The graph below illustrates this theory. The yellow and green graphs depict that multiple small-cap cycles (yellow) can fit within a single large-cap cycle (green). The blue and red graphs show that small-cap cycles follow large-cap cycles in rising markets. During weak large-cap cycles, small-cap activity tends to be flat and less active.

Tracking factors that influence big-cap cycles, such as US bonds, bond yields, the US dollar, and economic indicators like the Federal Reserve's interest rate decisions and inflation data, is essential. This broader view helps in forming an informed perspective rather than relying solely on ETF-related assets like SPY and IWM.

Small-cap stocks thrive in a strong overall market, where gains from big caps are often reinvested. However, small caps have distinct cycles influenced by news-driven "runners" that tend to spike and fade throughout the day. This pattern has led many traders to adopt a short bias, anticipating declines post-peak. Over time, aggressive shorting can lead to dramatic short squeezes, where the stock price skyrockets as short sellers rush to cover their positions. This, in turn, fuels FOMO among traders, who then chase rising stocks, often resulting in rapid gains followed by swift declines. This cycle repeats as traders recalibrate their strategies.

Some traders make decisions based on daily time-specific patterns. Here is an interactive widget I prepared: by pressing the times on the clock, you can explore the different trading activities throughout the day.*

Additionally, there are several seasonal trends that savvy investors track and trade, offering significant advantages when understood and leveraged effectively.

During election years, stock market volatility often increases due to uncertainty over potential policy changes. Small-cap stocks, in particular, can be highly sensitive to shifts in regulations and economic policies influenced by election outcomes. For example, in the United States, small caps have historically shown a tendency to rally in the months following presidential elections, especially if the results favor pro-business policies.

Seasonal demand for commodities also impacts market trends. Gold prices, for instance, tend to rise during the summer months due to increased demand from India, where gold is traditionally purchased for weddings and festivals. Similarly, the demand for chocolate peaks during the winter holidays such as Christmas and Valentine’s Day, driving up prices and potentially benefiting small-cap companies in the confectionery industry. Agricultural cycles can also affect prices, such as wheat, where a poor harvest one year can lead to higher prices the next, impacting small-cap stocks in the agricultural sector.

The adage "Sell in May and go away" is based on the historical underperformance of the market during the summer months, suggesting that investors should sell their stocks in May and re-enter the market in October. Small-cap stocks, which are often more volatile, might experience more pronounced seasonal effects. Historical data indicates that small caps often underperform during the summer and tend to rally in the fall and winter.

Retail stocks, particularly small-cap retailers, often see significant increases in sales during the holiday season, such as Black Friday and Christmas. This boost in sales can lead to stock price increases, as strong holiday sales are reflected in earnings reports released in the first quarter of the following year. Similarly, the back-to-school season in late summer can lead to higher sales for small-cap companies in the retail and apparel sectors, positively impacting their stock prices due to increased sales volumes during this period.

Lastly, the tax season around the April tax filing deadline can influence consumer spending and saving behaviors. Small-cap financial services companies often see increased business from tax preparation services and related financial products, with companies providing tax-related software and services experiencing a spike in sales leading up to the filing deadline. Understanding these seasonal trends and their impact on small-cap stocks can provide investors with valuable insights and opportunities for strategic trading.

The price

The price is the crucial subject in trading. The preceding chapters on float, volume, and time are merely tools to aid in forecasting or determining future price movements, whether in the short or long term. Ultimately, if you can buy low and sell high, or sell high and cover low, you are making money, and that is the essence of trading.

To determine the price, you need to decide on the type of trade you are entering. Almost every price action ties into three fundamental concepts:

1. 1. Reversal Plays/Price: This relates to the support and resistance theory.
2. 2. Trend Continuation: These are breakout plays.
3. 3. Consolidation: This involves range or oscillation plays

Traders can be divided into three groups: buyers, sellers, and the undecided, who wait on the sidelines. Buyers aim to pay as little as possible, while sellers seek to charge as much as they can. This conflict is reflected in bid-ask spreads. A buyer can either wait for prices to drop or pay what sellers demand. Similarly, a seller can wait for prices to rise or accept a lower offer. A trade occurs when there is a momentary meeting of buyer and seller. The presence of undecided traders adds pressure on both bulls and bears. Buyers and sellers must act swiftly, aware that undecided traders may step in and snatch away their deals at any moment. A buyer knows that if he hesitates, another trader might buy ahead of him. A seller knows that if he holds out for a higher price, another trader might sell at a lower price. This crowd of undecided traders makes buyers and sellers more willing to negotiate with each other. Each trade represents a meeting of minds. Every price reflects a momentary consensus of value among all market participants, expressed through action. Prices are created by masses of traders — buyers, sellers, and the undecided. The patterns of prices and volumes reflect the mass psychology of the market.

Conclusion

Congratulations on finishing the article!

This piece serves as an initial glimpse into how I intend to structure my course content. I would greatly appreciate your feedback: What did you like, and what didn't resonate with you? Are there any specific topics you wish to see covered? Which areas should I explore in greater depth, and which should be more concise?

I hope to receive input from traders of all levels, from beginners to intermediates and advanced practitioners. Please don’t hesitate to reach out — your insights are invaluable to me.

Bear in mind that I trade full-time and dedicate my weekends and nights to working on these articles and the course. This is only the beginning, and while it may take some time, I am committed to delivering comprehensive and thoughtful content. Thank you for your patience and support.