What is Float Rotation and Why It Matters to Day Traders
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What is Float Rotation and Why It Matters to Day Traders Float rotation is a reference to the amount of times a stock’s entire float, or available shares, is traded during a single trading day. It typically occurs on lower float stocks that are trading with exponential volatility. It was coined by Nate Michaud, a professional day trader and purveyor of InvestorsUnderground.com. What is a Stock Float? If you’re new to trading and need to understand what a stock float is, be sure to check out our tutorial on the impact that stock float has on trading . As a quick recap, a stock’s float is the available shares to publicly trade that are not restricted, owned by insiders of a
What is Float Rotation and Why It Matters to Day Traders
What is Float Rotation and Why It Matters to Day TradersWhat is
Float Rotation and Why It Matters to Day Traders
Float rotation is a reference to the amount of times a stock’s
entire float, or available shares, is traded during a single
trading day. It typically occurs on lower float stocks that are
trading with exponential volatility. It was coined by Nate Michaud,
a professional day trader and purveyor of
InvestorsUnderground.com.
What is a Stock Float? If you’re new to trading and need to
understand what a stock float is, be sure to check out our tutorial
on the impact that stock float has on trading.
As a quick recap, a stock’s float is the available shares to
publicly trade that are not restricted, owned by insiders of
a
company, or generally closely-held by institutions.
The Formula Imagine a small cap company (ABC) has 20 million shares
outstanding. Company employees and management own 5 million shares.
That leaves 15 million shares.
In addition, hedge funds, pension funds, and other institutions may
have closely-held shares in the amount of 10 million. This leaves
only 5 million shares available to trade.
We would consider 5 million to be the stock float. It’s what is
left to buy and sell by the general public.
What is Float Rotation? Now that we have an understanding of
floating stock, in general, let’s take it a step further.
The small cap company we mentioned above, ABC, normally only trades
about 10,000 – 20,000 shares per day. Very low volume.
Let’s say ABC is priced somewhere around $3.
However, there is something brewing within company ABC: a product,
a sales deal, a collaboration, an FDA approval, something that is
PR worthy.
Early one trading day, the company releases the news and suddenly
the stock price gaps up in the premarket on heavy volume. By 9:30am
the stock is trading at $5/share and has already reached 5 million
shares in premarket volume.
What has happened?
The free float was only 5 million shares to begin with. It has
traded 5 million shares already on this day. Therefore we would say
that the float has rotated 1x times already.
Let’s look at a few examples of this.
Here we have a snapshot of AAPL with over 16 billion shares
available in the float:
AAPL Daily Chart
Over the course of a month, AAPL moved about 18%. Not bad, all
things considered.
But let’s compare AAPL to a stock with a float of 17 million
shares.
EYES is a great example:
EYES Daily Chart
In contrast to the slower, steady movements of AAPL, EYES ran over
2000% in just 4 days. Granted, there was likely a catalyst — some
news or event — but the point remains, that the lower the float,
the more volatility can occur.
The Intraday Rotation Continuing with the EYES chart above, let’s
zoom into the action on the first large volume day that launched
the stock.
What we find is that EYES had traded over 17 million shares before
the market opened at 9:30am. That means it had rotated the float at
least once.
EYES trading through the float in the premarket
As Nate Michaud points out, what occurs when when a stock’s float
rotates is that we have a “refresh” of shareholders, especially as
a stock begins to squeeze higher and higher.
It’s a lot like a Ferris wheel. Some traders jump on for the ride,
some jump off. But there are only so many seats on the Ferris
wheel. And whoever is in control, bulls or bears, get to determine
the direction of the spin.
To better understand, let’s look at all the times that EYES rotated
through its float during that big day.
EYES float rotation intraday
For each vertical line you see on this 1 minute chart, EYES has
traded over 17 million shares. By 12:30pm that day, EYES had traded
22x the float. Or, it had rotated the float 22 times before
1pm.
That is a lot.
For AAPL to do that, it would have to trade 4 x 1010 shares in a
single day.
You do the math.
By the end of the day, EYES had traded over 700 million shares —
nearly 7x its market cap in a single day. Insane volume.
What Does It All Mean? At this point, you’re probably wondering
what significance float rotation has.
If you don’t trade the high stakes world of low float stocks, it
may not impact your trading as much. As a concept in and of itself,
it just means a lot of shares were traded that day.
However, it becomes important contextually if you are trading this
type of security.
Why? It all depends on the setup and your bias.
We talk about this in more detail as part of our Guide to VWAP
Boulevard. If you have time, it is worth a read.
Suffice it to say that that if you are a short biased trader who
thinks EYES is too overbought as it goes from 100% to 200% to 1000%
on the day, you may want to pay attention to float rotation before
you decide to go short.
Think of it like “reverse FOMO.” Bears are afraid they’ll miss out
on the top.
For that reason, every 5 minutes or so, there is a complete refresh
of the shareholders day trading this stock. Remember
the Ferris wheel analogy?
Shorts are getting blown out, and covering. Then new ones are
adding in again, only to get blown out. So forth and so on. The
bulls are in control and taking the bears for a ride in a direction
they don’t want to go.
By the time they’re let off the Ferris wheel, it’s too late.
They’ve run out of carnival tickets to go for another ride.
Now, this is a bit of a generalization, but for all intents and
purposes, when you see a stock float rotating this rapidly, you
either want to be long, or you want to step aside.
It can be dangerous business riding the low float Ferris wheel with
the bulls.
Factors That Can Affect Float There are a handful of things that
can affect the float of a stock, but only one that is particularly
influential on float rotation.
Share buy backs, stock offerings, insider lock-up expirations, and
stock splits are a few ways a float can be affected. Heavy
institutional ownership can also create volatility if big funds
decide to liquidate their shares.
Regardless, the most important to watch for in day trading is
usually the company offering.
Offerings Many times smaller cap companies will take advantage of
PR campaigns, product releases, or news events to raise money for
the company. What better way to do this than dump more shares of
their company into the hands of unsuspecting investors or
traders?
However, the impact on shareholders can be devastating.
For an example, have a look at this chart of COCP. What was a
fantastic bull run on this day ended in a blood bath.
COCP momentum killed by offering
COCP was up over 180% on the day when the offering was
announced.
Despite the float rotating violently throughout the day, all it
took was a load of new shares injected into the market to kill the
momentum.
We discuss this particular setup in our Kill Candle explanation.
Believe it or not, these events can be anticipated to some
degree.
Keep that in mind.
How To Find Float Data There are more than one ways to find float
data. Yahoo! Finance has float data along with Finviz.com and
others. Here is an example of the fundamentals you can find for
free on finviz.com:
Finviz fundamentals snapshot
Brokers typically have this data as well, if you subscribe to a
platform with fundamentals data.
How To Practice Float Rotation As with any trading setup or
criteria, we recommend back- testing and visualizing your
strategies in a realistic but safe environment first. There is no
better way to do this than in a simulator.
At least take a sampling of 20 trades. This way you’ll know what
your success rate is with that strategy before putting real money
to work.
Good luck and stay safe in the market!