Candlesticks and Volume

[brownsfan019 17]

After watching the webinar from Joel and reading a few of these VSA threads, I thought I'd get a candlestick and volume thread going.

 

Now, I should start by saying this - my use of volume is about as basic as it comes. We are not talking about a huge in-depth analysis as seen in the VSA thread.

 

I will try to get some screenshots up in a bit, but the basic premise is simple - using candlesticks as the PRIMARY trade reasoning and then take the trade if volume CONFIRMS (as a 2ndary) that trade idea. In other words, instead of just taking any random hammer, take a hammer that has much higher volume than seen elsewhere.

 

The results should be less trades (vs. just taking a candle pattern), but that's ok if it weeds out some losers. We can discuss and open up to any timeframe as well.

 

It's kinda funny how your trading career can go sometimes - when I first got into trading, I was heavily into volume reading. So much so that it paralyzed my decision making. So I slowly used it less and less. After listening to Joel, a few things clicked and it's interesting how after years of experience, things can look differently. Again, the idea is simple - candle pattern + good volume = good setup. You'll soon find out that my definition of 'good' volume may be different than the VSA'ers, hence the reason for a separate thread. I did not want to get into a theoretical debate about whether the volume in question is acceptable or not.

[brownsfan019 17]

Here's a setup from today on the 1 minute, ES chart:

 

 

So far, that called the high of the day. While that is neat in hindsight, no way can you go into a trade expecting to pick off the HOD and LOD each and every time.

[brownsfan019 17]

Here's an interesting one from today:

 

 

 

Now the high volume is actually on the red hammer type thing but that trade would require a fairly wide stop. The very next candle - a spinning top that is also a harami type setup provided an incredible risk/reward. In essence, the need to 'borrow' the volume from the previous candle was needed here. I THINK that is a VSA thing where the red candle has the major volume and the 2nd one shows no interest to continue the down move, so can get long here.

[brownsfan019 17]

Now, before anyone runs out and commits trading suicide by blindly following something, here's 2 losers that I had today as well:

 

 

 

 

 

BOTH of these failed as far as I am concerned. I only showed you what I was looking to initiate the trade, but both did in fact get stopped out later.

[brownsfan019 17]

Here's a "patience trade" that is really testing my patience currently. I am currently in this position:

 

 

 

This is a "patience trade" for me b/c it is requiring patience to give this room to work. Not my forte. I was trying to get long on the hammer, but that did not fill so remaining short for now. Volume looks to be in the direction of the short, so we'll see.

[jjthetrader 10]

I look forward to the growth of this thread. I like to see how others incorporate VSA into what they feel comfortable with.

Thanks for starting it.

Do you actually trade off a 1 min chart?

One thing to note is that the strength/weakness that you see appearing on your x-min chart will only exist for x amount of minutes there after. This tripped me up for a while.

[brownsfan019 17]

I look forward to the growth of this thread. I like to see how others incorporate VSA into what they feel comfortable with.

Thanks for starting it.

Do you actually trade off a 1 min chart?

 

Yes - I think I said above that this was a trade that I was currently in. That was true.

 

The 1 minute with a volume histogram is kinda fun actually. Very easy to see spikes and can get some prime entries as well with my candlesticks.

 

[brownsfan019 17]

One thing to note is that the strength/weakness that you see appearing on your x-min chart will only exist for x amount of minutes there after. This tripped me up for a while.

 

Please elaborate on this comment.

Thanks!

[jjthetrader 10]

Please elaborate on this comment.

Thanks!

 

Let's say you've got a 15 min chart and you have weakness appear. You are likely to have that weakness hanging around for at least 15min. It was Tom Williams himself that spoke about it. It doesn't mean it will only be 15 min, it just means you are likely to have it there for 15 min. This is also why he says "when you see a bar like this (weak up bar) on the 3 min go short right away". Of course this could also be the high of the day and continue down the rest of the day but you're likely to get at least 3 min or whatever it is.

 

In Tom's bootcamp in the Forex section is where I'm referencing from.

[404 10]

Great thread BF. I love your candlestick analysis. Lets keep this thread going.

[brownsfan019 17]

Let's say you've got a 15 min chart and you have weakness appear. You are likely to have that weakness hanging around for at least 15min. It was Tom Williams himself that spoke about it. It doesn't mean it will only be 15 min, it just means you are likely to have it there for 15 min. This is also why he says "when you see a bar like this (weak up bar) on the 3 min go short right away". Of course this could also be the high of the day and continue down the rest of the day but you're likely to get at least 3 min or whatever it is.

 

In Tom's bootcamp in the Forex section is where I'm referencing from.

 

Interesting, I will have to watch that.

 

A possible trade setup off this information could be:

 

1) Enter on 1 minute (for prime risk/reward setup).

2) Flip to a 3 minute to see if setup appears there as well and if so, we can expect a 3 minute move.

3) Continue process up the ladder - 5, 7. etc.

 

Purely an idea at this point.

[HAL9000 10]

Hi Brownsfan,

 

if I understand you right, you want to move a trade from a shorter time frame into a longer one and so on ...

 

If I'm right, I think I remember a free webinar, in which was talked about this strategy (tactic). If you are interested, I will search for it. I hope that I still have the link somewhere.

As you know, these free webinars nearly always have only one purpose, to sell something. But anyway the presentation of this idea was worth watching it.

 

So let me know,

 

Hal

[james_gsx 16]

Glad to see this finally come up. I've been very interested in combining other types of analysis along with candlesticks such as volume and MP.

 

Heres one quick trend play that you could do using WRBs. As we know, typically a WRB is followed by an easy short to scalp, but if you use volume with the WRB then you could probably get some nice setups.

 

1 - As you can see we start off with a WRB, and lets say you want to go for a quick short at the exit OR wait for a candle to go short. For textbook style play let's just say we went short at the close of the spinning top that immediatelly followed. This is an ideal setup because the volume of the spinning top is nearly identical to that of the WRB. This will make it easier for some of the newbies.

 

 

2 - Two candles later we have a test of the WRB open or low. You can exit here for a quick profit or you could see that volume has been declining. We have smaller bodies and taller wicks, but the lack of volume would tell me theres no interest in demand as it is quickly shoved back down. So we could move our stop just above these wicks to protect our profits. Then we get a rise in volume, and a candle that breaks through those lows this would be our confirmation of a new trend.

 

 

3 - Now we get a hammer and volume as been slightly rising. Since there is a nearby support level we may be tempted to exit this trade and take the hammer. If we did that, we still have a nice profit and obviously the hammer would have failed. No big deal, thats life. OR we could have waited until something more meaningful to a trend appeared like a MA crossover, oscillator, or a hammer with STRONG volume. For the sake of hindsight and textbook style play let's say we waited. A few candles later we get a hammer with STRONG volume (similar or more to the WRB). That obvsiously screms that buyers are present. We happily exit the trade and go the other way for our hammer setup, and walk away with a new sum in our bank account.

 

 

Now to be fair this isn't a setup where you see a spinning top after a WRB and assume you can nail near 20pt ES trade. BUT if you started with a simple 2pt play and closesly followed volume you could have turned that into a nice trade.

 

For the sake of argument and realism, here are a few losers in the same day.

 

 

Heres another play we could have used.

 

1 - Clearly defined hammer after a WRB and volume is very similar.

 

 

2 -Next we get a follow through WRB with strong volume. Typically I think we would have taken the hammer and a quick profit with the WRB and been happy. Or we could let volume tell us that buyers are still heavily present in the market and hold onto the trade from here.

 

 

3 - Our trade continues to move higher and we eventually test the long term MA. Knowing this is a counter trend play I think most would be disciplined to take their profits here. Just in case this doesn't happen the high volume inverted hammer would tell us the bears quickly counter attacked with equal force keeping price down. So you could take your profits at the close of this inverted hammer and still had a healthy trade. Or else you would have waited for the spinning top with low volume to tell you the move was over.

 

 

So overall I'm starting to see a pattern of nice candlestick patterns following WRB with EQUAL OR MORE volume.

 

How a trade could possibly setup.

1 - Reveral candle after WRB witih equal or more volume. If I'm not alread scalping for a quick reversal of the WRB then enter on the close of the reversal candle.

2 - Wait for a signal such as an oscillator, moving average, or another candle (with strong volume like the WRB) to exit my trade.

 

I think this would be a trade that would have to materialize, I don't think you could just see it happen in real time and take it. But I do think it would go along with what you said earlier about taking a typical setup, and using volume expand on it and capturing a bigger move.

 

I think this is a good start though. Once I feel more comfortable with my knowledge of MP I would love to start a thread combing candlesticks, volume, and market profile into one setup. I believe if we could blend a lot of these great analysis together we could have an extremely efficient trading plan and one that we could use to expand our careers. I also don't think volume is something that would complicate our plan, just compliment it

Edited February 9, 2008 by james_gsx

[jjthetrader 10]

You guys are doing a great job here. So much so that last night I was dreaming about chasing tails, and I don't even use candles. I plan on starting to combine them though after seeing your guys great work.

[brownsfan019 17]

Hi Brownsfan,

 

if I understand you right, you want to move a trade from a shorter time frame into a longer one and so on ...

 

If I'm right, I think I remember a free webinar, in which was talked about this strategy (tactic). If you are interested, I will search for it. I hope that I still have the link somewhere.

As you know, these free webinars nearly always have only one purpose, to sell something. But anyway the presentation of this idea was worth watching it.

 

So let me know,

 

Hal

 

Hal,

I'd love to see it as I am sure many others would!

[brownsfan019 17]

A few comments from James_gsx very informative post:

 

WRB's

On the smaller timeframes that I have watched the WRB's on, there are MANY instances where you see what James has here - a big WRB and an immediate retrace of some/all of the WRB. Click here for more info on WRB's if you are not quite sure what they are or how to read them.

 

I personally view the WRB trade as this - when you see a WRB, look for a candle signal (as illustrated by James here) to look for a reason to go against that WRB that just appeared. The premise is simple - when you have a big move in a short period of time, it can be difficult to sustain that move (esp. during the regular day, i.e. outside of econ news).

 

 

 

ENTRIES/EXITS

As I discussed in this thread, part of the key here is to elaborate on whether entry/exit criteria was met. The reason I mention this is that I do not see a loser in this chart on the 2nd trade:

 

 

On the 2nd trade (1st one failed), my entry criteria would not have been met. Just an FYI.

 

 

Same thing on this hammer:

 

JUST seeing what I see here, I would be ATTEMPTING to get long.

 

 

Note - this is in part to the smaller timeframe that I am looking at (1 minute). One the 1, I want a little extra confirmation to get into the trade.

 

Good analysis James. It looks like your charts on a 5 minute interval so the next question is watching lower and higher timeframes to see if there are better opportunities. I know the 1 minute sounds like a very short time (and it is) but the risk/reward moves strongly in your favor. The catch being that you will take some 'chop' trades that otherwise would not be present on a bigger timeframe.

[lylo 10]

Here's an interesting one from today:

 

 

 

Now the high volume is actually on the red hammer type thing but that trade would require a fairly wide stop. The very next candle - a spinning top that is also a harami type setup provided an incredible risk/reward. In essence, the need to 'borrow' the volume from the previous candle was needed here. I THINK that is a VSA thing where the red candle has the major volume and the 2nd one shows no interest to continue the down move, so can get long here.

 

Great idea for a thread, BF. I am trying to do the same, as I believe candles are a good indicator of market psychology, and can be combined with VSA.

Looking at the chart you provided, that was a perfect marriage of candles and VSA. That is a morning star, a 3 line candle formation (along the lines of 3 is better than most 2 and better than most single candle signals) Having the bear candle with so much volume, indicating possible strength, is awesome. The morning star was your confirmation.

 

lylo

[thnickster 10]

I've tried volume as an indicator and find it unreliable..for me anyway. I have much

more reliable signals for trend change and small moves. Quite long ago I realized that much of the ER2, ES, and EUR moves could be utilized by taking small hits with many contracts..especially ER2 as it reverses quickly. In my opinion..say..if you trade 3 contracts and only take 2 pts..that is 6 minus cost in and out..around $4.80 in some places. So you get around $72 minus $14.40..around 58 bucks per hit. You can do this all day. Mixed with some really strong longer ones..you've got a nice day. I often hit over 90% with my signals.

[brownsfan019 17]

I've tried volume as an indicator and find it unreliable..for me anyway. I have much

more reliable signals for trend change and small moves. Quite long ago I realized that much of the ER2, ES, and EUR moves could be utilized by taking small hits with many contracts..especially ER2 as it reverses quickly. In my opinion..say..if you trade 3 contracts and only take 2 pts..that is 6 minus cost in and out..around $4.80 in some places. So you get around $72 minus $14.40..around 58 bucks per hit. You can do this all day. Mixed with some really strong longer ones..you've got a nice day. I often hit over 90% with my signals.

 

Interesting points thnickster. Feel free to start a new thread to discuss!

[Rahmat 10]

Interesting setup using this method. I will try it out for Forex Trade.

Thanks James

[nycdweller 10]

Thnickster, what kind of realible signals do you use for trend change and small moves? Thank you.

 

 

I've tried volume as an indicator and find it unreliable..for me anyway. I have much

more reliable signals for trend change and small moves. Quite long ago I realized that much of the ER2, ES, and EUR moves could be utilized by taking small hits with many contracts..especially ER2 as it reverses quickly. In my opinion..say..if you trade 3 contracts and only take 2 pts..that is 6 minus cost in and out..around $4.80 in some places. So you get around $72 minus $14.40..around 58 bucks per hit. You can do this all day. Mixed with some really strong longer ones..you've got a nice day. I often hit over 90% with my signals.