Jun 22, 2021
Written by:
John McDowell
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.
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.
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.
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.
Generally speaking, the volatility of a security’s price movement is inversely correlated with the size of its float. The lower the float, the more volatile a stock can become.
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:
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:
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.
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.
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.
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.
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.
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.
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?
These offerings typically happen during moments of high demand and momentum. For obvious reasons, the company wants the best price for their shares.
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 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.
Nonetheless, that is the modus operandi in low float land. Inflate the price, raise money, and leave the retailers holding the bags.
Keep that in mind.
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:
Brokers typically have this data as well, if you subscribe to a platform with fundamentals data.
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!
Tags: Technical Analysis
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