Volume: How can it be used in trading?

I thought this could be a good topic for discussion and one where chart examples abound.

I personally find extremely low volume in a normally traded (Other than a thinly traded penny) more important and a better signal to the trader than extreme volume.
reaction to tests of both high and lows in close proximity are also great guides.

Having traded VSA now for over 3 yrs I find it extremely important in my day to day management of my discretionary trading.

Anyway interested in how other approach and use volume and even range in their trading.
I'll show some of my own usage as time goes on with the topic.

Re: Volume as a trading signal

tech/a said:

I personally find extremely low volume in a normally traded (Other than a thinly traded penny) more important and a better signal to the trader than extreme volume.

reaction to tests of both high and lows in close proximity are also great guides.

Click to expand...

I'm interested to see these two points. Thx.

Re: Volume as a trading signal

My topic heading was purely VOLUME however someone has altered it.

If you wish to alter it I would prefer.

Volume---how can it be used in trading.

Re: Volume as a trading signal

MRC & Co said:

I'm interested to see these two points. Thx.

Click to expand...

I'm interested to see if you have any interpretation of volume at points of Support/Resistance?

I too would be interested in your/others inputs.

Re: Volume as a trading signal

Here are 2 typical consolidations with clear support and resistance boundaries.

We see them every day and the question everyone asks is how can we be sure to the best of our technical ability which way these consolidations will break OR will they just continue to drift.

There are clear clues in both charts based on pure volume and range.
Before I mark them up any comments/opinions/observations?

How would you trade these?

Re: Volume as a trading signal

Hi,

I use Volume and volume charts as a primary indicator, I see the effect volume has on price/ and equally when volume has lack of effect, as a major indicator of sentiment.

Reading volume can be similar to "reading the tape" and often will uncover what the wholesale side are trying to hide. Hiding large transactions on a time chart would be quit easy, volume chart can show when the same amount of volume fails to move price as much as has happened in the preceding volume candle.This means there is volume coming from the other side of the move, if price then stops changing but volume continues, you likely have a large player active against the trend.

I dont explain well, nor do i type as fast as I can think, but over the last 18mths reading volume have developed a much greater understanding of where price is likely to go, than I have after 10yrs of looking at time based charts.

If the market opens at 00 seconds and everyone has their favoured time chart close each candle at the same time as everyone else, it becomes easy for major players to buy/sell one direction for part of that minute then reverse for the last few seconds which then appears as good volume and direction opposite to what the biggest volume is actually doing. Repeat the process for several minutes and you have a 5min chart appearing to head opposite to where the major volume is really going. It does not take long to have retail traders hooked on the "apparent" move.

By adjusting the volume which appears in each volume candle it is possible to see this process in action and more easily catch the moment when a move exhausts and price changes direction as well as having a better understanding what is really happening.
Tick charts attempt to do similar yet are not as efficient because they count orders not volume and an order can be 1 or 1 million, tick chart sees both as equal when clearly they are not

I use volume analysis and find it valid on long term periods of daily weekly even monthly timeframes.
I continue to use other indicators in my decision process, although they are playing a smaller part than ever before, at the same time my win/ loss is improving and % win increasing also.
Some of the improvement could be attributed to improved skills due to continued experience in trading but I believe volume analysis is the main factor in my improvement. I will continue to explore volume as a trading tool and expect further results as my understanding increases.

Cheers,M

Re: Volume as a trading signal

tech/a said:

Here are 2 typical consolidations with clear support and resistance boundaries.

We see them every day and the question everyone asks is how can we be sure to the best of our technical ability which way these consolidations will break OR will they just continue to drift.

There are clear clues in both charts based on pure volume and range.
Before I mark them up any comments/opinions/observations?

How would you trade these?

Click to expand...

I would watch to see if someone starts bidding it up in the DOM tech


But in that first case picture I would buy because of that last volume spike, then once it had moved up, I would buy again on any dips... unless of course it runs into massive volume up there.

Second case, with the lack of volume, it looks basically like a pennant with its decreasing volatility. I would be likely to buy at the bottom of that range, because it spiked up before it entered that range and didnt move back down quickly.

Re: Volume as a trading signal

Hi Tech,
Comments on the charts
Chart 1 .

The first test higher which created the pivot high (beginning of your resistance line) with a wide range candle was on lower volume than prior up candles, suggesting weakening move, next candle failed to extend on higher vol which reads a move lower expected.
3 candles down to test support was on relatively low vol.. reads as does not have enough volume to take it lower
Then 3 candles higher,again not enough volume to take price higher so price again needed to test support.
Next test of support (wide range candle) opened at support, traded lower and then closed up on good volume ..reads bullish
Next 2 candles almost no volume down..reads bullish
I would buy the next close above the pivot low candle's high which had changed the sentiment to bullish.
The last few candles had high volume on the up days, low volume on the down days ..reads still bullish.
The last candle showing had high volume for a short candle which means there was sellers at the obvious resistance so i would tighten my stop to just below the low of the last red candle, but considering the increase in volume in this move up compared to the prior attempt at breaking the resistance, I would say odds were in favour of a break higher through the resistance..

Second Chart...

A high volume attempt failed at the left side of the chart and little interest for me after that with no conviction either way. Small candles and small range = meandering sideways.

Gee, a five second look at a chart takes a whole lot of explanation

Cheers, M

Re: Volume as a trading signal

First chart, would have probably bought on 2nd red bar from the right, the test like bar. Not so sure about higher prices at the right edge, last red bar is a positive sign, but that last bar makes me a bit iffy about higher prices, being at the top of the range, and it hasn't closed higher, narrow range, would have liked to see that last bar break the range.

Second chart doesn't interest me at all, wouldn't go near it.

To be honest I don't really pay attention to volume unless its extreme or none, so unless it stands out as something different in other words, otherwise I don't even notice it.

....but that's just me.

Re: Volume as a trading signal

tech/a said:

My topic heading was purely VOLUME however someone has altered it.

If you wish to alter it I would prefer.

Volume---how can it be used in trading.

Click to expand...

Sorry, that was me.

With more than 14,000 threads here at ASF I sometimes need to retitle threads to be a bit more specific, otherwise we end up with a dozen threads on volume related topics all called "Volume".

Have retitled it again according to your suggestion.

From an educational perspective this chart is interesting: wide ranging days, closes well off both the highs and lows.

At first glance, you would say that sellers keep dumping which accounts for the shooting stars and the offloading should weaken the price ( and it certainly does on some subsequent days).

But are buyer's absorbing this supply? Why is there an overall upward bias? Are the last few days of trading pointing to a new run - some would say the volume is too heavy and masking supply.

I look for a few things which arent exactly text book in a chart when a stock which is trending (Regardless of timeframe) pauses in consolidation.
I look inside that consolidation for clues---to either continue to hold---Buy---Sell---Or add to a position.

Here is the first.Using the 2 charts initially posted as examples.

Now the 2 charts above are actually taken from the same chart.
Now I have put them together and introduced the concept of VOLUME Support and resistance Zones.

You can now see how these 2 concepts of volume analysis can be used when analysing a consoildation area---large or small.
You can also see a myriad of ways to trade them from a number of signals.
Next I will comment on $20 sheos chart from my own perspective.

Click on chart to expand

To $20Shoes chart.
You need a little more chart to see the big picture hope you dont mind shoes.
Wont be long and we will see what happens---my money is on a resistance and continuation of the ranging---unless we get a strong gap and volume to suit above the obviuos resistance.

Click to expand.

This is a great thread thanks tech.

Re your comments on low volume. I have a chart I use to highlight low volume events to me, very helpful indeed.

We always rely on research when making trading decisions. The research has indictated that volume has little to do with price. However, strong up days combined with high volume-- specifically largest up day in 10 days combined with largest volume the returns over the next day were up .25%, next week up .60% and next month up 1.45%. This was the only edge the research discovered in using volume

marketsurfer said:

We always rely on research when making trading decisions. The research has indictated that volume has little to do with price. However, strong up days combined with high volume-- specifically largest up day in 10 days combined with largest volume the returns over the next day were up .25%, next week up .60% and next month up 1.45%. This was the only edge the research discovered in using volume

Click to expand...

To a large degree I do agree on high volumes,however extremeties(High and Low) tend to hold the key.

Any chance of getting that research.I'm interested in exactly what aspect of volume (High.Low,At resistance,at Support after X periods of X volume,on large range days on very narrow range days---its endless)was researched and who by. PM me and Ill give you an email address.

Could you define what "edge" meant from the research.You often hear "edge" bandied around without an explaination as to what edge actually is?

I think I'll start a thread on this topic alone.

We always rely on research when making trading decisions.

Click to expand...

That we do and all we can do is anticipate from our analysis how a trade will perform.
Frankly if my anticipation is in correct 3 out of 4 times and when its correct I have a long and successful trade more than covering previous losses---I'm a happy camper.

marketsurfer said:

We always rely on research when making trading decisions. The research has indictated that volume has little to do with price. However, strong up days combined with high volume-- specifically largest up day in 10 days combined with largest volume the returns over the next day were up .25%, next week up .60% and next month up 1.45%. This was the only edge the research discovered in using volume

Click to expand...

Hi surf,

What instrument is that test on?

Just on the topic of volume, here's a great post by Rob Hanna on volume on breakouts in the US markets:

http://quantifiableedges.blogspot.com/2010/03/testing-common-knowledge-about-volume.html

tech/a said:

To $20Shoes chart.
You need a little more chart to see the big picture hope you dont mind shoes.
Click to expand.

Click to expand...

Not at all and appreciate your feedback.
My concern with the last few trading days is that their hasn't been an efficiency in price movement with the commensurate volume that has remained consistently strong last week.

There is a lower probability of a breakthrough - that is what the volume is telling us right now.

One thing that is seemingly counter-intuitive to some Tech, and I have seen you mention this before, is that you don't necessarily need volume for a run. It is the lack of volume, or rather the drying up of sellers that allows the demand to translate into higher prices. So where marketsurfer mentions that research, it is rather the absence of volume that can paint the picture ( like your test days on low volume).
High volume days are a breed of their own and need to be thought about in the context in which they occur.