Daytrading - Big Picture/Volume Analysis

[EMC2Trader 10]

It is very easy to lose the “Forest for the Trees,” or the big picture, when day trading. Part of the big picture is volume analysis, and part of the big picture is macro price analysis.

 

Since I am new to this forum, I wanted to mention a few things, and Ill stay brief. I am a passionate trader just like many of you here.

 

In browsing the forums, my sense is this a place for traders to offering interesting information to other traders, and that’s what Ill “try” to do here as well. (I’m sure for some this information will be interesting, for others it may be entertaining, and for others it will be meaningless and dismissed)

 

I will also be very upfront and say I trade, and have put together an approach to trade the ES market using this information, which can be found at Trading Creations, but I will certainly not use this forum to actively promote this approach.

 

I feel the information explains he basis for the way I look to trade, and can benefit traders no matter what approach you use.

 

In the end, it is my opinion, that you simply need some type of a solid plan that you have the confidence and discipline to follow on a consistent basis. The big picture, including macro price structure and volume analysis, can be very helpful

 

So, Ill begin by sharing my thoughts on big picture/volume analysis applied to the ES market that will hopefully be of some interest, and then Ill continue to show examples of how volume and big picture analysis comes together in the current ES environment, and of course respond to any questions/comments along the way, and truly, my only hope is for everyone to do well in their trading, no matter what style, or approach they use.

 

 

Day trading and Volume – If you have never considered “Big Picture Price Structure and Volume” in your day trading, maybe this information will provide something new for you to consider. It certainly can be applied in many different ways.

 

We know that price vacillates all over the place, up and down, in the day timeframe. For those of you who have studied Market Profile the following will make a lot of sense to you. Assume that price action up and down, is nothing more than price moving up and down to fill “Big Patient Orders” in the market.

 

In other words, forget about trends, support, resistance, or anything else other than the fact that all that is happening in the market is that whichever patient participant (buyer or seller) wins the tug or war battle for big orders, price is going to go there.

 

Conversely, if there are no patient orders in a certain price area, price will move to another area to seek out where the patient orders are.

 

With this perspective, you can see how lower prices are often not “sellers pushing price lower,” but rather price moving lower to find the big orders of patient buyers in control.

 

Higher prices do not have to represent “buying pressure,” but instead can be the only course price can travel, after “all” buyers have patiently bought lower, and now the only participant looking to act are the patient sellers up above. Price must go higher in response to this imbalance.

 

When you view price as nothing more than a vacillating entity looking to fill whichever patient participant is in control, volume analysis can be the shining light with regard to price movement, showing where the big orders are, when the big orders are drying up, and where price is likely to go next, either to seek out new participants, or continue on its path to satisfy the big orders of existing participants.

 

For trading purposes, we start by watching for volume extremes to develop, and then we watch to see what happens next.

 

Consider these two quick examples.

 

First, assume price makes a new high on heavy volume (patient sellers plus anxious buyers pushing price higher). Patient sellers are in control. A pullback occurs, and the patient buyers cannot gain control. What happens? The patient buyers become anxious buyers, and price rallies very fast to new highs. Therefore, the lower price creates very low volume because price doesn’t stay in the pullback area long, and anxious demand pushes price higher. Patient sellers with orders up above remain in control and price goes higher.

 

Second, assume price makes a new high on decreasing volume. Patient sellers in control are drying up in this area. Does this mean price will crash lower? No. It does mean price will either go much higher or much lower, depending if the patient buyers can take back control or not. Why? Because when patient sellers dry up in one area, they are now way above. If they continue to win the tug of war battle price moves way higher. If the patient buyers win the tug of war battle, then the patient sellers way above will cave in, become anxious sellers, and price will move way lower, as the cycle starts all over again in a new direction.

 

This is very much like a product that is priced too high, and not selling…Price going on sale will bring in heavy volume lower.

 

But if a product is selling well at higher prices, then a lowering of price will be a great bargain, and this lower price wont last long. A lack of volume develops at lower prices because demand pushes price back up fast.

 

I’m sure this is a lot of information to digest if you’ve never considered it before, but it is these patient and anxious buyer and seller tug of war battles and outcomes that cause big picture bracket, swing point, and consolidation areas to form, and when you watch the unfolding buyer and seller tug of war develop though volume analysis, and place these outcomes into the bigger picture context of price structure, it can lead to many high probability day trading opportunities.

 

For now, Ill post some charts of the big picture/volume structure that I see developing in the ES Market to try to make some of these points more clear

 

Again, I’m fully aware, this may be of interest to some, this may be entertainment for some, and this may be meaningless, or even offend some.

 

If it spurs some discussions about what is happening in the market, then great, because frankly, this is what I am most passionate about.

 

07-20-08

 

Here is a Daily ES chart (left), Intermediate ES chart (middle), and Shorter ES Term chart with Volume (right) in an effort to point out important: Swing Points, Brackets Areas, Consolidation areas, Volume Developments, etc.

 

The ES consolidated all day on Friday (middle), and volume completely dried up on both extremes (right), so the market is coiling between 1260-1250, the patient buyers and sellers are both way above and below now, so breakout move is coming from this consolidation. (Remember when a patient participant dries up in an area, price will move big either up or down).

 

On the daily chart (left) we see a steady one directional down move in place. Often, such moves will retrace 40-50-60 percent at some point. We can see that a breakout above 1260 will likely run to the bracket low area of 1280 (left) Then if we can get beyond this, a 40-50-60 retrace can move to the next 1330 swing area (dashed line)

 

On the downside, a break below 1250 consolidation will take price to the 1240swing area (middle), and if that breaks, it looks like another test of the 08 lows.

 

[BlowFish 10]

Welcome to TL. Interesting first post.

 

I wonder if it is worth talking a little about patient and anxious participants. I have a fairly good idea but it seems an important concept behind your approach so worth making sure everyone is on the same page.

 

Cheers.

[Marsupilami 10]

Hello EMC2Trader,

 

I have read your thread on ET, and frankly, I must say, I find your approach of looking at the market quite confusing. Although I'm by no means an expert at interpreting volume, the things I have read about VSA so far made much more sense to me than your concept of anxious and patient sellers/buyers etc.

Since there are a lot of knowledgeable members on TL, I'll leave it to them to discuss this concept.

I have also googled your website, seen the daily statements. Why don't you spend one or two days with some members in the chat room and discuss trades as they unfold, posting your entries and exits.

 

You will have to admit, these results are hard to believe ...10 points here, 18 there etc. You should be in control of the CME pretty soon, if you aren't already.

Regards,

Marsupilami

[BlowFish 10]

What do you find difficult? Seems kind of a straightforward way of looking at things to me. There are many ways of looking at the market base on fundamental structure.

 

Aggressive vs Passive (those that will bid the price up vs those that are prepared to place limit orders and wait for the market to come to them). This seems close to anxious and patient. Liquidity supliers vs takers. Again this fits in with the original premise. Those that need to trade vs those those that don't. Those initiating and those closing. Informed vs uninformed. The list goes on.

 

VSA as a technique has merit (imo) however some of the more marketing orientated claims are based on naive and fallacious assumptions. Of course its appealing when its sold as "follow the smart money" and "80% of the volume is the professionals" (which means a large number of professionals are not making profits btw). It's just rhetoric and no surprise that hucksters like <cough> 'professional trader GH' have jumped all over it). Let me be clear I'm not knocking VSA but if you really want to find out who trades, why, when & how, do yourself a favour and read Trading Exchanges & Market Microstructure for Practitioners by Harris. Not sure why its not a classic.

[atto 20]

I too have seen the ET thread, but I'm interested in what you have to say, and how you support your argument. What kind of thread do you want this to be?

 

The concept sounds good, and I get the premise. One thing I questioned is that how can you tell when there are "No Sellers"? The "no volume" area on the chart above looks about the same as the other valleys, which were met with more and more selling.

 

Thanks, welcome to TL, and hope you enjoy it here!

 

edit: Your track record looks extremely impressive, but I'd rather keep this discussion on your method than what you do outside of here (I think the moderators would agree with me too). If you wanted to join us in the chatroom during market hours, we'd love to chat.

[EMC2Trader 10]

First of all, I wanted to simply say thank you for some very respectful responses right off the bat. Ill simply say, I’ve heard that this is an excellent community of traders, and I have no doubt I can learn many things here too.

 

I don’t claim to know it all, or have the perfect way to trade or anything like that. I’ve simply studied Market Profile concepts since the beginning (Yes I have original Steidlmayer, CBOT stuff on my bookshelves), and have determined a pretty simple way to put it to some practical use.

 

As far as my trading, what you are all seeing is a very mechanical method of trades with consistent entry and exit rules that flow from the beginning of the trading session to the end. I have developed this too over many years of trying all kind of things in the market.

 

There are many winning and losing trades alike (like any method), and my contention is that when you tie these mechanically based trades into an understanding of bigger picture structure, this can be of great benefit, although every trade setup by itself is designed to be a higher probability set up according to a “go with the flow” approach of price action.

 

As I figure out how everything works here, I would be happy to drop into the chat room and tell you when entries and exits are taking place real time, etc…This is actually the easy part since they are all very mechanical, so while it may seem hard for you to believe the track record of trades I post every day, it is nothing more than a mechanically based way of going with price action flow in market that fortunately contains very volatile swings from the patient and anxious participants I reference.

 

But again, I didn’t even know there are chat rooms here, or how they work, who is in them and discussing what etc?. so I’m happy to learn more about this.

 

Finally, I truly am not here claiming to know it all about trading- far from it actually. I know I have integrated some things together nicely after trying many approaches for many years, and I equally know that what I’m doing can I’m sure be improved in some ways too, and that there are many other approaches out there that are equally effective, and probably much more so.

 

So, in terms of this thread, yes I’m not here to go over my trading. My passion comes from the analyzing the bigger picture of unfolding market structure, and I think when you are in sync with the big picture it can help all trading approaches.

 

So, I was just hoping to go over unfolding ES structure, discuss the way I look at it all technically, and answer any questions along the way, etc. and see if this information can help others the way it helps me.

 

I know some of this may seem confusing at first, but I was simply trying to lay out a foundation of why price moves in the market as I have learned, and then hopefully I can show how this comes together in a more practical way by continuing to look at the unfolding nature of ES price structure- assuming everyone doesn’t get a big headache first .lol.

 

I will go back and read some of the posts and start specifically answering some of the questions etc., and thanks for welcoming me here. I look forward to discussing, and learning things too.

[atto 20]

Sounds great, I hope we can all learn something. A few of us hang out in the TL chatroom, which is linked above (also: here). Feel free to drop by.

 

Hope you enjoy TL as much as I do.

[EMC2Trader 10]

Hello EMC2Trader,

 

I have read your thread on ET, and frankly, I must say, I find your approach of looking at the market quite confusing. Although I'm by no means an expert at interpreting volume, the things I have read about VSA so far made much more sense to me than your concept of anxious and patient sellers/buyers etc.

Since there are a lot of knowledgeable members on TL, I'll leave it to them to discuss this concept.

I have also googled your website, seen the daily statements. Why don't you spend one or two days with some members in the chat room and discuss trades as they unfold, posting your entries and exits.

 

You will have to admit, these results are hard to believe ...10 points here, 18 there etc. You should be in control of the CME pretty soon, if you aren't already.

Regards,

Marsupilami

 

Marsupilami,

 

Yes, as you and Im sure others here know, I started this discussion on ET, and then I was told by several, that this is an excellent Traders site, so I apologize if some of the things overlap, and in time Ill figure out how to best handle this.

 

The approach Im discussing here is simply to get you in turne with the big picture of price action....Where are the brackets, swing points, consolidation areas, etc...how the patient and anxious participants form these areas, and how you can moniotor their behavior to make logical assumptions about what is taking place in the market.

 

Thank you for mentioning VSA...I am not familiar with it, and from the brief description, it sounds like this can be something very valuable from more of a trade timing standpoint...I use only price based entry and exit now, although because I use volume share bars, this makes volume my constant, so I am able to take advantage when price speeds up or slows down according to volume.

 

I look very much forward to learning about VSA to see if it can improve what I am now doing!

 

Finally, as stated, my results are very mechanical, and not every trade is a winner as you can see...I simply just look to do the same entries over and over again when they develop, and manage the trades without ever having a profit target ahead of time...

 

As far as running the CME..lol, I go into great detail describing how these trades put you in an excellent starting position to do well...What happens if you take 2 losing trades in a row, and quit for the day?... You are now down 3.5 points and the running the CME option doesn't look very good anymore.

 

But if you have the mindset to think in probabilites and stay the course with consistent execution (with my approach or any approach), then that is what I feel is most important with respect to outcome.

[EMC2Trader 10]

Welcome to TL. Interesting first post.

 

I wonder if it is worth talking a little about patient and anxious participants. I have a fairly good idea but it seems an important concept behind your approach so worth making sure everyone is on the same page.

 

Cheers.

 

Blowfish,

 

Yes I agree, so here an introduction of what I am talking about, to hopefully get everyone on the same page:

 

Introduction to Identifying Patient Buyers and Sellers

 

When you set a good measure for up and down volume against price (i.e. volume ratio), you will be able to see where volume reaches an extreme, or reaches a level where “patient” orders are.

 

When a volume extreme is reached, price will do one of three things: (1) Immediately move to an opposite extreme to fill opposite patient orders (i.e.- all big buy orders filled low, go to fill big sell orders high), (2) Hang around this area and continue to fill remaining patient orders with help from the anxiety of opposite patient orders that turn into anxious orders because they aren’t being filled (i.e.- there are still more patient buy orders to fill at low prices, price rises but never reaches the point where patient sell orders are, so patient sellers turn anxious and sell lower, while buyers remain patient and buy lower), or (3) Hang around in this area and even though there less patient orders to fill (i.e. - Most patient buy orders are filled low, and price moves back down to this area with few patient buy orders left to fill).

 

In case one, volume extreme vacillation means you are in a range with a single set of patient orders above and below. Eventually all patient orders dry up, price contracts, and price will have to move far out of this area to find new patient order participants.

 

In case two, a volume extreme is the beginning to discovering many patient orders in an area. This condition is accompanied by opposite participants who are impatient to wait for price to come back to fill their patient orders. Therefore, a volume extreme in one direction is followed by a non-extreme in the other direction, and price moves back in the original extreme direction to fill the orders of the patient participant in control. In this case, price movement consists of both buyer and seller –one patient, the other anxious.

 

In case three, a volume extreme discovers a decent amount of patient orders, and price continues to hang around in the area to fill these orders without a push from opposite side anxiety (Opposite side patiently waits for price to eventually come back to them).

 

Therefore, as price continues to fill all patient orders of one participant, volume slowly dries up signifying all patient orders in this area are filled, and price must now move in an opposite direction to fill the orders for the patient participants waiting on the other side.

 

When you place all this understanding in the context of not predicting how this will unfold, but reacting to how it unfolds according to market structure, it can result in very powerful trading opportunities.

 

Here are a few examples:

 

1. If you see one volume extreme move to another volume extreme, know activity is starting to dry up in this area, and price is getting ready to move to a new area altogether. The trading implication is to stop taking new trades until you can recognize which patient big picture participant will win the tug of war waiting for price to come to it.

 

2. Strong volume extremes, followed by a lack of opposite volume extremes, means a continuation of current price direction is likely (big orders on both sides contributing to the continuation as one side is anxious, the other side patient). The trading implication is to look to enter new trades on pullbacks that aren’t experiencing volume extremes.

 

3.Strong volume extremes followed by price continuation that is unaccompanied by new volume extremes, means the patient orders are drying up in this area, and the other side is remaining patient to wait for price to come to back to it. The trading implication means price will either go much higher or lower form here, therefore you can either exit existing positions, aggressively enter counter trend trades if other appropriate big picture conditions are in force, or stay with the current trend with much tighter stops

 

I have attached a chart highlighting these three conditions

 

Conclusion – There are many ways to apply these volume conditions in an overall day trading approach. If you start watching what happens to price after volume extremes are reached, I think this may open up a whole new way for you to classify price behavior in the context of what is unfolding in the market according to prices main role- filling patient orders in the market according to the balance or imbalance of patient orders that exists or, according to whatever market participant (buyer or seller) is displaying the most patience or anxiety at the given moment.

 

[ATTACH]7339[/ATTACH]

[brownsfan019 17]

Can you explain more about the volume ratio that you are using?

[EMC2Trader 10]

Can you explain more about the volume ratio that you are using?

 

Brownsfan,

 

I use the Volume ratio study in Tradestation (I know Multichart users can access it, and I wish it was in every other program.)

 

The Volume Ratio indicator calculates an exponential moving average of the ratio between up and down volume. The exponential average is then plotted as an oscillator around a zero line.

 

Again, this indicator serves my purposes to step back and observe how the bigger picture in unfolding.

[Guest forsearch]

I take it that this Volume Ratio study requires the discrete UpTicks and DownTicks count for each bar, correct?

[EMC2Trader 10]

07-21-08

 

We came into the day monitoring the tight 1260-1250 consolidation area.

 

Price opens up above with absolutely no volume confrimation (right), and this sets the stage for price to drift back into, merge, and slightly widen the overall consolidation area.

 

So we go into Tuesday with two merged consolidation days, and this continues to set the stage for a nice eventual breakout that will tell us a lot about where the big picture is headed next.

 

[EMC2Trader 10]

07-22-08 Pre-Open Comments 6:00 am Price=1250

 

Although this looks like a big gap down, at the moment we are simply at the bottom of 1260-1250 consolidation area...We had a false break up on low volume yesterday, and we'll have to see if the same happens today on the downside

 

We do have nice resistance at the 1256 area inside oonsolidation (from the patient buyers yesterday) if there is to be directional movement today, but we still need to keep a close eye on if this is going to be a 3-day merge of overlapping value or not?

 

We start with a down bias, which will stay in force as long as 1256 area holds to start, and then we will monitor how price moves relative to this 1260-1250 consolidation area.

 

[justlurkin 10]

Does anyone have the source code for Volume ratio or even a detailed description on its calculation as it is used here? I'd like to be able to follow along.

 

thanks

[EMC2Trader 10]

Does anyone have the source code for Volume ratio or even a detailed description on its calculation as it is used here? I'd like to be able to follow along.

 

thanks

 

JustL

 

I use the indicator as is in Tradestation, and I know others have been able to import it into Multicharts without a problem....I know some are trying to code it for Ninja, but as of yet Im not sure how that is going, and Im not sure if other charting programs have this indicator, or a way to plot up volume vs down volume in a similar way?

[Guest forsearch]

JustL

 

I use the indicator as is in Tradestation, and I know others have been able to import it into Multicharts without a problem....I know some are trying to code it for Ninja, but as of yet Im not sure how that is going, and Im not sure if other charting programs have this indicator, or a way to plot up volume vs down volume in a similar way?

 

I take it that this Volume Ratio study requires the discrete UpTicks and DownTicks count for each bar, correct?

[EMC2Trader 10]

Here is an Example of how things come together for a high probability trade setup

 

We know we are in an overall 1260-1250 bracket now, and identified possible resistance within this bracket if price was to hold, and move lower.

 

Once price moved past this resistance on heavy volume (right), it opened the door to a high probabaility long trade after a pullback to move to at least to the top of the main bracket 1260-1250 bracket

 

[atto 20]

I take it that this Volume Ratio study requires the discrete UpTicks and DownTicks count for each bar, correct?

Yeah, it sounds like it works like that.

[Bearbull 10]

Here is an Example of how things come together for a high probability trade setup

 

We know we are in an overall 1260-1250 bracket now, and identified possible resistance within this bracket if price was to hold, and move lower.

 

Once price moved past this resistance on heavy volume (right), it opened the door to a high probabaility long trade after a pullback to move to at least to the top of the main bracket 1260-1250 bracket

 

[ATTACH]7358[/ATTACH]

 

Nice example, here is the chart with normal Vol histogram, illustrating the same setup, upward thrust accompanied with high vol indicating buying pressure, and pullback on low vol. signifying lack of offerings, or supply

Just another way of looking ,

 

Do you find that there are significant differences in the way you use vol and the one depicted in the attached.

[DbPhoenix 42]

Nice example, here is the chart with normal Vol histogram, illustrating the same setup, upward thrust accompanied with high vol indicating buying pressure, and pullback on low vol. signifying lack of offerings, or supply

Just another way of looking

 

Or.....

 

[EMC2Trader 10]

Bear/Bull,

 

First, I agree that the general concept is the same here, and if you can use the vertical total volume lines to see clear high volume points, low volume pullbacks, etc..then great. I used to try to get a handle on volume this way too but it was equally as confusing as clear to me many times, so yes I feel the volume ratio (up and down volume within the high/low volume) provides a much clearer ongoing picture relative to the way Im looking to tie volume to the bigger picture and trading decisions.

 

I have attached two charts side by side, and as I look back at the vertical volume, I see some areas with very clear low volume confirmation and others not so clear, but I know how difficult I found categorizing price and volume in this standard way.

 

Also, for bigger picture analysis, standard market profile volume distribution always works very well to see key high and low volume areas.

 

But again, this is just what I have found. We are on the same page in terms of application.

 

[EMC2Trader 10]

Here is the way Ive grown to view tight consolidation areas such as the one that was developing in the ES for the last 2 1/2 days

 

When you have a tight consolidation that coils for a long period of time, we all know a breakout is coming.

 

Since a consolidation is marked by patient buyers and sellers drying up above and below, we know both patient participants are now located way above and below this range.

 

Therefore, when you see a volume extreme inside the range, you know this presents an anxious participant, not a patient one, and this is in all liklihood the clue as to who will win the all important patient participant tug of war.

 

Today, the buyers turned anxious on the volume extremes higher, and the patient sellers won the tug of war as price moved, out of the range, and strongly to the upside.

 

[Marsupilami 10]

Marsupilami,

 

 

 

As far as running the CME..lol, I go into great detail describing how these trades put you in an excellent starting position to do well...What happens if you take 2 losing trades in a row, and quit for the day?... You are now down 3.5 points and the running the CME option doesn't look very good anymore.

 

 

Hello EMC2Trader,

 

thanks for the reply. I was simply amazed by you track record. You do have losing trades, as one can obviously see, but the monthly results mentioned, which hover around 200 points in the ES a month ( from the back of my head) make most other traders' results look quite pale.

Of course, this thread is not supposed to be about your course, as you state, so I don't want to get into this much further.

[EMC2Trader 10]

Clarification - I received a question yesterday and I just wanted to make something very clear for those of you out there following along.

 

This is never an exercise in prediction or making calls of any kind, but rather an exercise in observing unfolding market structure (ie.. brackets, swing points, consolidations, etc.), then seeing where volume/price extremes develop within this unfolding structure, and then making higher probability assumptions of what will happen next from a trade entry standpoint.

 

Here a few examples.

 

1. If price breaks an intra-day support/resistance area on a volume extreme, a pullback would be a good place to enter.

2. If price is moving strongly in one direction, and a volume extreme develops in the opposite direction, expect imbalance to turn into balance for a period of time

3. If price works its way to a prior volume extreme area on low volume, price will move strongly away form this area, either up or down..

4. Volume extremes inside lengthy consolidation areas represent the anxious, not patient participants, and send a high probability clue as to where price is likely to go next.

 

So, this has nothing to do with “prediction.”

 

The premise is you can look at unfolding market structure, watch where volume and price extremes develop within this structure, and then make higher probability decisions about what to look for from a trading standpoint.

 

It is a cycle that is never ending, and continuously shifting, from areas of balance, to imbalance, to balance, over and over again..