Volume: How can it be used in trading?

[tech/a]

Tuesday 15 June 2010

Sorry gents, we disagree.

TH: Your first negative makes no sense to me. If volume is weak when approaching an area of resistance, the market activity is saying there is not sufficient buying effort to break through the overhead supply. If the volume is strong and the range size increases, there is a greater likelihood that resistance will give way. Knowing where the trend is at the time is also important as an aid in
assessing the situation.

To your second comment, price approaching resistance on smaller volume is not necessarily a lack of supply. It would more likely be a lack of demand, and the size of the range for that day would confirm it. Supply is already proven by virtue of the existing resistance. The burden is on buyers to increase their volume effort to break through the old supply. Less volume = less buying effort.

tech/a: Increased volume in an up move is a clear demonstration of buyers being in control. The location of the closes would confirm that, as well. If high volume were to be supply, there would be no uptrend.

It is agreed that a decrease in volume would be indicative of a lack of demand, in an uptrend, where the range is generally smaller. The same decrease in volume, but with a wider range bar to the upside would be a lack of supply, as what buyers there were encountered little resistance.

There are no "secrets" in reading price and volume analysis. It is a matter of hands on experience, like anything else.

Sorry, but your second paragraph is not clear to me.

Reading volume is more of an art form that cannot be reduced to a formula.
At times, it can appear to be confusing, but when kept in context with the prevailing trend of the chosen time frame, volume falls into an identifiable intent/meaning. The higher the time frame, the more reliable the read. Once one gets into very small intra day readings, there is a lot of "noise" and it can be less reliable.

Cheers!

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[Trembling Hand]

Sorry gents, we disagree.

TH: Your first negative makes no sense to me. If volume is weak when approaching an area of resistance, the market activity is saying there is not sufficient buying effort to break through the overhead supply. If the volume is strong and the range size increases, there is a greater likelihood that resistance will give way.

To your second comment, price approaching resistance on smaller volume is not necessarily a lack of supply. It would more likely be a lack of demand, and the size of the range for that day would confirm it. Supply is already proven by virtue of the existing resistance. The burden is on buyers to increase their volume effort to break through the old supply. Less volume = less buying effort.

We clearly believe the completely opposite, for that I am very happy. But when a price approaches a resistance level tell me how can extra relative volume be supplied?

Not by buyers it must come from holders/sellers. Only then can volume increase. If they don't add extra volume for the buyers anyone wanting to fill buy orders are forced to pay higher and higher prices resulting in a breakout. If the volume is matched by holders then no breakout = resistance.

 

[$20shoes]

It would make my life a lot easier if volume were as simple as a two paragraph entry in a trading text ( which is what most texts spend on the topic).

A lot of the time the story unfolds behind the obvious.

You can see that Post 165 has a clear example ( sucked me in) that volume on an upmove does not necessarily translate to buyer support.

https://www.aussiestockforums.com/forums/showpost.php?p=546994&postcount=165

 

[Wysiwyg]

It would make my life a lot easier if volume were as simple as a two paragraph entry in a trading text ( which is what most texts spend on the topic).
A lot of the time the story unfolds behind the obvious.

Much gratitude goes to Nick Molchanoff for creating this version of a bullish/bearish volume graph. There are many tails in this picture but the obvious ones are:
A) the divergence of bullish volume from the rising All Ords price
B) the crossing of bullish/bearish volume
C) the peak of capitulation with the bearish volume
and
D) above average volume (blue bars)

Bit of a plug for Amibroker and it's versatility.

 

[$20shoes]

Thank you. I still feel that you have to eyeball volume in the context of what is going on in the market place. So an indicator can "indicate" but it can't "educate". There are some VSA flags etc on some packages that take the guesswork out.
But what is not obvious to many traders trading setups based on volume is the "subtleties" of volume analysis (i'm still a novice).
Would you mind posting a chart using that volume indicator for HGO from approx March 1st to Jun 1st? Thanks WYSIWYG.

 

[Trembling Hand]

Thank you. I still feel that you have to eyeball volume in the context of what is going on in the market place. So an indicator can "indicate" but it can't "educate". There are some VSA flags etc on some packages that take the guesswork out.
But what is not obvious to many traders trading setups based on volume is the "subtleties" of volume analysis (i'm still a novice).
Would you mind posting a chart using that volume indicator for HGO from approx March 1st to Jun 1st? Thanks WYSIWYG.

I wouldn't think you need much in the way of indicators to figure out this one.

Few other points not marked due to getting too messy but,

 

[ThingyMajiggy]

Yeah another interesting thing to do is to take a look at a chart but flip everything around as far as the colours of the volume goes, most of the time its green volume bar because the candle is a higher close etc. But if you swap it around, because of the high volume in either direction is a sign of the opposite way(high volume up bars signal supply coming in so expecting down movement, high vol down bars signal support coming in so expecting upward movement, depending on the following action obviously, but basically its that way).

Just something that can help, you make the red volume bars green and green ones red, can help get your thinking right, so when you get the big spikes, its the opposite colour to help you remember demand or supply coming in etc. like I have done with this 5m ES chart from last night, I thought it might be something to try for those that can't grasp the high volume up=supply and high vol down=demand and fading high volume etc.

 

[tech/a]

T/H and Sam.
There is some great stuff here.

I dont have the time right now but feel this whole question of confusion needs de mystifying.

I'll do this tonight and under its own thread.
In this Topic area.

 

[Wysiwyg]

Just something that can help, you make the red volume bars green and green ones red, can help get your thinking right, so when you get the big spikes, its the opposite colour to help you remember demand or supply coming in etc. like I have done with this 5m ES chart from last night, I thought it might be something to try for those that can't grasp the high volume up=supply and high vol down=demand and fading high volume etc.

That is a good idea because I found high volume made me impulsive and sometimes a mental wrestle to switch the thinking.

 

[$20shoes]

Excellent - very helpful stuff. Let me look at it in more detail tonight.

 

[Wysiwyg]

Would you mind posting a chart using that volume indicator for HGO from approx March 1st to Jun 1st? Thanks WYSIWYG.

From 1 March to 2 June.

 

[Wysiwyg]

Can't use volume that can't be seen. Watch millions of dollars buy/sell between the visible bid/offer price. I suppose limit orders are the only way to work with dark bid/offer pools but how deep are the pools.

 

[tech/a]

Volume is visible once it has bought or sold.
Where it lies above below or at the price of little value
in analysing bull or bearish tendencies. It can be added
to or subtracted from with no effect on price.

Once used it can be seen.
Then IN RELATION to the chart it can be analysed.

 

[Wysiwyg]

Volume is visible once it has bought or sold.
Where it lies above below or at the price of little value
in analysing bull or bearish tendencies. It can be added
to or subtracted from with no effect on price.

Once used it can be seen.
Then IN RELATION to the chart it can be analysed.

Yes that is true. Are Market Depth traders at a disadvantage regarding invisible volume?

 

[tech/a]

I don't think so.
As you say set a limit order as you see it and wait to be
filled or not.
A days volume can alter the analysis so a limit order maybe
a wise thing.

I guess if your filled and you see volume being churned without a reaction in price
that tells you supply is definitely evident.

 

[pixel]

Yes that is true. Are Market Depth traders at a disadvantage regarding invisible volume?

I'm not sure what you mean by "Market Depth traders". If you think of them as traders that watch market depth, then I'd contend that they would be most likely to place limit orders - unless one were chasing a stock up or down, desperate to build or liquidate a position. If I know at least roughly where current bids and offers are sitting, I can apply the observed trade direction and momentum to place a lower bid (or higher sell offer) away from "Market" and still be reasonably sure to get a fill. Personally, I always enter limit orders, even if my limit matches the current top line of market depth. That's because I cannot know whether someone else might beat me by a nanosecond, driving my "at Market" away from what I had intended to trade at.

Incidentally, I also place "Best" or "Centre" orders half a tick away from the top level of M/Depth. If such an order is filled or gets a nibble, that fact tells me that there is at least one "hidden" or "dark" counter party willing to compromise. That, too, is a valuable piece of market information.

 

[CanOz]

Can't use volume that can't be seen. Watch millions of dollars buy/sell between the visible bid/offer price. I suppose limit orders are the only way to work with dark bid/offer pools but how deep are the pools.

I'm not sure your understanding of dark pools is correct....

 

[Wysiwyg]

If I know at least roughly where current bids and offers are sitting, I can apply the observed trade direction and momentum to place a lower bid (or higher sell offer) away from "Market" and still be reasonably sure to get a fill.

As a relatively small position size market participant, 1/4 cent graduations don't make a huge difference. However all the information isn't on the table regarding orders and importantly their size.
Example, if a 5 cent spread was the standard and there were levels at every cent between with hidden orders then it would be hard to know what price to enter. All one could go with is the last traded price and volume when it appears in Course of Sales.
Another thing I noticed is when I place an order at the 1/4 cent graduation, trades will sometimes leap it to the visible depth. This could be a broker execution issue but ASX market transparency is not now what I expect.

 

[Wysiwyg]

I'm not sure your understanding of dark pools is correct....

Change the word pools to orders if you like but they are hidden from the public.

 

[Wysiwyg]

So "Dark Orders" is the new word for orders not visible to the public.

Chi-X
All Mid-Point Orders are completely hidden, which minimises information
leakage and market impact when posting liquidity.