Volume: ARCHIVE

[DbPhoenix 42]

I moved your post here because the Foresight thread requires the trade to be posted in advance rather than hindsight, along with the plan, of course.

 

I'm perplexed by several of your statements, but my questions are meant to clarify the situation, not to suggest that your choices were wrong.

 

Hi DB,

 

Taking you up on your offer of help with volume analysis from the CouldaWouldaShoulda thread . . .

 

I shorted the ES into the close today. Although this decision was made systematically, here are the general 'reasons' behind it:

 

1) The long term trend appears to be down.

 

How are you defining "long-term trend"? What had been a downtrend appears to have been broken last week. Can you post a chart which shows what you're looking at?

 

2) The market has become over-extended to the upside in the short term.

 

How are you defining "over-extended" and "short term"? What prompts you to arrive at this conclusion?

 

And here are the additional factors that encourage me to think that this is a sound decision, even though these factors form no actual part in my trading:

 

3) The market has traded to the top of a downward-trending channel.

 

See above. It appears to be trading outside a trading range that was created when the trend line was broken. Again, I need to know what you're looking at.

 

4) Volume was lower today, despite the move higher. I currently tend to regard all volume in the indices as buy-side volume, and assume that the market is not actively traded short (obviously it is, and so this is a crude generalisation, but it seems to be statistically valid). I therefore expect high volume at market bottoms (as buyers step in at new 'bargain' low prices), and low volume at market tops (as buyers refuse to buy at unreasonably high prices).

 

Volume may have been lower in the ES (it was also lower in SPY), but it was higher in SPX. But whether or not one can rely on futures volume figures, volume itself is neither buy-side nor sell-side; it's both. If buying pressure is stronger than selling pressure, price will rise. If the opposite, price will fall. As for tops and bottoms, volume can dry up or be climactic at either. So "volume" isn't going to help you here. The salient points here are that price traded to the upside out of a trading range and that it closed at the high, or near to. That's about it.

 

I'd love to here your thoughts on any of the above, or any questions you have that you think may help me to better understand the significance of volume within this structure.

 

Many thanks,

 

BlueHorseshoe

 

Hope my comments were helpful.

 

Db

Edited June 17, 2012 by DbPhoenix
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[BlueHorseshoe 10]

I moved your post here

 

Db

 

Hi Db,

 

Thank you for your reply.

 

Given that the markets closed for the weekend within minutes of my fill, my post could hardly be said to benefit from hindsight, but I'm happy with whatever thread you prefer to discuss this in.

 

As for why my statements may appear somewhat 'vague' - whenever I quote specifics on this forum they generally get a dismissive "oh that will never work" response, even when I know full well that they have worked across countless markets over many decades (not that this guarantees that they will continue to do so in future). Though this doesn't affect my trading, it does irritate me greatly, and I prefer to avoid it.

 

Now to your questions:

 

I consider the trend to be down because prices have fallen, on average, since mid May. Granted, in the long(er) term the S&Ps are trending upwards and the past month may just have been a pullback within this uptrend, and in the shorter term (the price action I am fading) price has also trended higher over the last few weeks. But it is the timeframe between these against which I am interested in anchoring my positions.

 

"Over-extended" (to the upside) simply means that price has closed significantly higher relative to the prior few days.

 

The fact that a particular trendline may have been broken by a day's trading doesn't seem to me to be of importance with the ES - the market is mean-reverting and breakouts are better (on average) to be faded than traded with. I am not suggesting that this is the case with other instruments.

 

And on to volume . . . Volume doesn't currently play any part in my trading decisions (hence why I'm here). My understanding of volume, as described, is based upon quantitative study of volume and the ES. On average, the ES tends to peak on low volume and bottom out on high volume. This isn't always the case, as you point out, but it only needs to be true more often than not to be useful. My reasoning for why this is the case may be flawed, and of course my statement may only coincidentally be true.

 

Can you offer me a different interpretation? Or could you explain why you consider volume in futures to be misleading?

 

Look forward to your reply.

 

BlueHorseshoe

Edited June 17, 2012 by DbPhoenix
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[DbPhoenix 42]

And on to volume . . . Volume doesn't currently play any part in my trading decisions (hence why I'm here). My understanding of volume, as described, is based upon quantitative study of volume and the ES. On average, the ES tends to peak on low volume and bottom out on high volume. This isn't always the case, as you point out, but it only needs to be true more often than not to be useful. My reasoning for why this is the case may be flawed, and of course my statement may only coincidentally be true.

 

Can you offer me a different interpretation? Or could you explain why you consider volume in futures to be misleading?

 

Look forward to your reply.

 

BlueHorseshoe

 

My interpretation was offered above. I have nothing to add to it. As to the volume, if you're not going to use it, why plot it? If you are going to use it, then I suggest, again, that you evaluate how it is represented in all the related instruments, in this case, the SPX, SPY, and ES, including those stocks which make up the SPX "Wave", 4 out of 5 of which broke out of trading ranges to the upside. Otherwise, as I've said elsewhere in this thread, volume is of most value during climactic moves. This was not a climactic move. Therefore, the volume is largely irrelevant.

 

I hope this trade works out for you.

 

Db.

Edited June 17, 2012 by DbPhoenix
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[BlueHorseshoe 10]

My interpretation was offered above. I have nothing to add to it. As to the volume, if you're not going to use it, why plot it? If you are going to use it, then I suggest, again, that you evaluate how it is represented in all the related instruments, in this case, the SPX, SPY, and ES, including those stocks which make up the SPX "Wave", 4 out of 5 of which broke out of trading ranges to the upside. Otherwise, as I've said elsewhere in this thread, volume is of most value during climactic moves. This was not a climactic move. Therefore, the volume is largely irrelevant.

 

I hope this trade works out for you.

 

Db.

 

Hi Db,

 

I do not normally plot volume. I am looking for a way to incorporate volume into my trading approach - so far I haven't found any way that provides a satisfactory compromise between net profitability and improved performance.

 

I don't think that I correctly understood your statement about looking at related instruments to be a suggestion in your previous post (I understood it purely as a commentary). This is helpful, and something that I shall explore.

 

Thanks for your kind wishes - but don't hope too hard for a profitable trade - I couldn't care less so there's no reason for you to do so either

 

I will of course report back with my exit, in 'foresight' if possible . . .

 

BlueHorseshoe

Edited June 17, 2012 by DbPhoenix
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[DbPhoenix 42]

Hi Db,

 

I do not normally plot volume. I am looking for a way to incorporate volume into my trading approach - so far I haven't found any way that provides a satisfactory compromise between net profitability and improved performance.

 

...

 

I will of course report back with my exit, in 'foresight' if possible . . .

 

BlueHorseshoe

 

We may have gotten our signals crossed way back in the CWS thread. If you're genuinely interested in volume, you will need at least to read the Volume thread as well as Section 14 of the course. Then we will be at least within shouting distance of the same page.

 

Db

Edited March 12, 2013 by DbPhoenix
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[joshdance 10]

On average, the ES tends to peak on low volume and bottom out on high volume. This isn't always the case, as you point out, but it only needs to be true more often than not to be useful. My reasoning for why this is the case may be flawed, and of course my statement may only coincidentally be true.

 

BH, I mainly consider volume on an intraday basis, so that may not really fit in with what you're trying to do. But as Friday was quad-opex, I ignore even intraday volume. The market does what it will do, and it was clearly trying to run up. I don't know about today and how the market will respond to Greece things after this gap up, but I don't worry about that and will trade what I see happening tomorrow. But seeing a rally up, making higher highs on low volume, is no good reason to short IMHO. Again, I don't mess with daily volume as it's outside the scope of my trading, but especially given the quad opex, volume doesn't matter at all in my world on days like Friday.

[joshdance 10]

I thought I would post this chart of today's action so far to illustrate how volume can be used. This is one approach, and this may not play out, but it's just one idea for you to work with, or dismiss at your leisure.

 

So the market opened quite lower, and made a nice run up. The volume on the way up was decent, but declining. We have a huge peak at the top, and then a subsequent strong sell lower, with quite sustained volume on the move down. To me, this is bearish. The market moving lower after failing to hold above Friday's high, and the move down being on sustained higher volume, indicates strong selling pressure to me, and I will be looking to be short. I don't know what will happen, but this is an idea generated from one interpretation of what I see. If it goes up and looks strong, I will not look to short; I try to adapt to what's happening now. But this is what I see as of now. I am posting this as it's happening, and not in hindsight, because I feel very little can be gained from an opinion based on already knowing the outcome, which is tainted by hindsight bias. Let's see how the day plays out, and this theory will be proven valid, or not, depending on what happens later.

[DbPhoenix 42]

I thought I would post this chart of today's action so far to illustrate how volume can be used. This is one approach, and this may not play out, but it's just one idea for you to work with, or dismiss at your leisure.

 

So the market opened quite lower, and made a nice run up. The volume on the way up was decent, but declining. We have a huge peak at the top, and then a subsequent strong sell lower, with quite sustained volume on the move down. To me, this is bearish. The market moving lower after failing to hold above Friday's high, and the move down being on sustained higher volume, indicates strong selling pressure to me, and I will be looking to be short. I don't know what will happen, but this is an idea generated from one interpretation of what I see. If it goes up and looks strong, I will not look to short; I try to adapt to what's happening now. But this is what I see as of now. I am posting this as it's happening, and not in hindsight, because I feel very little can be gained from an opinion based on already knowing the outcome, which is tainted by hindsight bias. Let's see how the day plays out, and this theory will be proven valid, or not, depending on what happens later.

 

The market may have failed to hold above Friday's high, but this was only after repeated attempts to penetrate resistance at 48. Thereafter, price fell back into yesterday's trading range and price was comparatively non-existent throughout, at least until 0330. So I'm not sure what message you believe volume is sending you, if any.

 

Db

[joshdance 10]

The premise did not play out as I had expected it might; the market made a new high a few minutes ago. The real trigger for me was the sustained strong volume on the selling that occurred after the original HOD. I must admit that I was simply fooled on this one. I have been paying lots of attention to price and giving only small amounts of weight to volume, in the last several months, with good results, and this time I gave quite a bit heavier weight to what I saw in the volume, and what I interpreted was not correct. If one thing can be learned from this example, it's that volume be interpreted many different ways (for example, heavy volume on the move down after the original HOD was absorbed quite strongly, vs. a viewpoint that it indicates heavy selling pressure), so one must be prudent and consider how much volume means to you as a trader personally!

[BlueHorseshoe 10]

The premise did not play out as I had expected it might; the market made a new high a few minutes ago. The real trigger for me was the sustained strong volume on the selling that occurred after the original HOD. I must admit that I was simply fooled on this one. I have been paying lots of attention to price and giving only small amounts of weight to volume, in the last several months, with good results, and this time I gave quite a bit heavier weight to what I saw in the volume, and what I interpreted was not correct. If one thing can be learned from this example, it's that volume be interpreted many different ways (for example, heavy volume on the move down after the original HOD was absorbed quite strongly, vs. a viewpoint that it indicates heavy selling pressure), so one must be prudent and consider how much volume means to you as a trader personally!

 

Hi Josh,

 

Thanks for your helpful comments. I have to call it a night now, but will respond on Wednesday.

 

Cheers,

 

BlueHorseshoe.

[BlueHorseshoe 10]

Hello,

 

I promised that I would report back with how this trade worked out.

 

My exit came with yesterday's close, for a profit of $937.50 per contract (I lost a few ticks on both entry and exit).

 

Not interested in labouring a single success which could of course be pure luck . . . but did want to point out that when the market peaked on 19th it did so on low volume - this supports the suggestion that I was making that index volume is predominantly buy-side, and that indices peak when buyers lose interest, rather than due to active short-selling.

 

BlueHorseshoe

Edited March 12, 2013 by DbPhoenix

[DbPhoenix 42]

Not interested in labouring a single success which could of course be pure luck . . . but did want to point out that when the market peaked on 19th it did so on low volume - this supports the suggestion that I was making that index volume is predominantly buy-side, and that indices peak when buyers lose interest, rather than due to active short-selling.

 

BlueHorseshoe

 

As I said earlier, and repeat here so that those who read this won't draw an insupportable conclusion, any swing high of course occurs because supply overcomes demand. But whether the volume is low or high or middling is irrelevant to the rollover. If one studies the phenomenon, he can find many examples of all. Remaining in a trade to the point where one is well in the hole simply because volume is this or that is a level of risk well outside the Wyckoff approach.

 

Db

[DbPhoenix 42]

I ran across an old post of mine from another forum and thought it would be useful here.

 

Db

Why do people get excited about volume spikes? Greed or fear. Amateur traders see volume spiking and think Oh God I'm Missing Something, and they try to jump on -- or out of -- a speeding train. Sometimes that volume can propel traders to a new level. Sometimes, at least in an upmove, it's pure distribution, and when new buyers find they have no one to sell to, price can plummet just as fast as it rose.

 

Part of the problem with regard to discussing price and volume is that not everybody is talking about the same thing. And some people think that definitions don't matter. But they do. And if one is going to think clearly about what's happening in front of him, he needs also to be clear about the language he uses to describe it, even if that language is purely internal.

 

Some people will say, for example, that they don't use volume, that volume is not important, even that volume is useless. But without volume, that is, trading activity, there would be no transactions and hence no price movement. That in itself makes volume important. What is often meant by statements like these is volume as an indicator, particularly a color-coded indicator, and those who feel that this sort of volume is pretty useless may have a point.

 

There is also the matter of volume as trading activity (which is how Wyckoff looked at it) and volume as "intent", which is essentially what bid and ask "volume" are about. But the trader who trades according to what people intend to do may not make the same decisions as one who trades according to the transactions that people are actually making. I may intend to sell the strawberries in my refrigerator for $100 a pint, but nobody's going to give a damn unless somebody actually meets my price and we conclude a transaction. That then becomes the price.

 

But is it the correct value? And mixing price with value is another area where traders tend to trip themselves up. Going back to your first post, a trader may have shares that he thinks are worth $10. But he can't find a buyer who thinks they're worth more than $5. The seller's price is $10 because that's where he's placed their value. The buyer's price is $5 because he's placed their value at that level. But that doesn't make either $5 or $10 the "price". The price is determined through negotiation until there is an agreed-upon amount, maybe $7.50. And if the two parties conclude their negotiation, the transaction takes place and $7.50 becomes the price, even if only for a few seconds.

 

Therefore, if intent matters to you and you believe that bid and ask "volume" truly reflect intent, then the bid and ask volume may be useful to you. But none of this has anything to do with the volume that is trading activity which in turn is the result of actual transactions which in turn result in prices that are printed on the "tape".

 

If there is no transaction, there is no volume, and everybody just stands around holding hands. Once a transaction takes place, then you've got something concrete, a benchmark to go by, and some clue as to the action you should take.

[DbPhoenix 42]

When it comes to the markets, a lot of it is like those pictures you're supposed to stare at fixedly in order to see something else within it. You either reach the Oh Yeah or you don't. And if you don't, it's most likely because you're not what Douglas terms "available".

 

Fortunately, in the markets, one can avoid grappling with reality for only so long, i.e., until he goes broke. Though quite a few people apparently refund themselves and begin again.

 

At some point, one begins to see why price moves the way it does. I can't say how many charts one has to look at (or how many tapes he has to follow) before this underlying structure shows itself, but I do know that the longer one focuses on interpretations of it, or commentaries on it, or reflections of it (as in a mirror), or third-party analyses of it, the longer it will take for him to see it, if he ever does.

 

As for the frame, that too disappears, and the snapshot becomes a stream-of-consciousness documentary. Which is why people who try to make volume bars into indicators aren't going to be happy with the results.

 

Db

[TradeRunner 10]

I have never found volume to be very useful, but today I have been rereading some of the most thanked posts including the ones in this thread.

 

Here is some of my analysis for NQ (6th Sept 2012). Is my analysis correct?

 

Unfortunately the analysis is hindsight (I'm not fast enough to do it in real time yet) although I did pick up on the failure to reach the range bottom and was thinking long at that point.

 

 

(NQ is making new highs in this contract and I haven't had a chance to calculate S&R at these levels)

Edited September 13, 2012 by TradeRunner

[DbPhoenix 42]

I have never found volume to be very useful...

 

(NQ is making new highs in this contract and I haven't had a chance to calculate S&R at these levels)

 

Pretty good for somebody who's "never found volume to be very useful" . The key is to view it as trader behavior, not as an indicator (e.g., VSA).

 

As for the S/R, I posted that this morning.

 

Db

[Gringo 10]

I am not very enthusiastic about volume any more. I'll have to do more testing but am seriously considering removing it altogether from my charts. There are many reasons for it but the only thing it tells me about is intensity of the trading. Other than that my entries and exits don't rely on it. Maybe for pure stock trading it's helpful but for futures and indexes I am finding it tough to incorporate.

 

When price gives a sell signal to me I don't care whether volume is higher or lower or whatever, I exit. This in a way indicates to me that volume is more of a distraction as well. Now I don't feel that confident about leaving it out altogether but during my testing I am going to attempt to get rid of it and see how things evolve. It's not an absolute giving up but a trail of sorts.

 

W, and Db, have both written extensively about volume and it's usage and having this dark cloud of experience over my head does scare me from letting go. Time will tell or shall I say more testing will tell. I may end up leaving volume on the chart but not paying much attention to it expect perhaps at major S/R.

 

My stocks and ETF's all have Vol by Price to determine areas of interest or trading ranges. Even the thought of volume-less existence is making me feel vulnerable. Perhaps for now I focus only on NQ futures and then see how things evolve.

 

The new clarity or the baby steps of clarity I gained was after observing the TBP thread that thread doesn't even have any talk of volume. If so much can be gained by stripping to the bare bones, that is to the price movement alone, how much more could be gained by sticking with this bare bones approach a bit more?

 

Any thoughts?

 

Gringo

Edited September 18, 2012 by Gringo

[DbPhoenix 42]

Due to a variety of factors, volume has become an indicator, particularly over the past ten years. Thus few people truly understand it and virtually everybody misinterprets it. As for the indices and futures, volume has become so corrupted over the past 30 years with all the hedging and arbitrage and fund buying and so forth that the used-to-be-useful variations have over time disappeared, making volume essentially irrelevant. One may find useful variations on a weekly chart when looking back over cataclysmic events, but that's about it. And how many cataclysmic events are there? And since so much nonsense about volume has been perpetrated and perpetuated by vendors, I've elected to leave it off futures charts since the more important goal is to illustrate S&R and trend and TRs. If one is focused on whether or not volume is "big", the primary goal gets lost.

 

Stocks, of course, are another matter. Volume still matters, but only under those circumstances I've detailed in this thread. So it really depends on what you decide to trade. If it's futures, skip it. If it's stocks, take it out for a test drive. If it's ETFs, it'll depend on the ETF and how much useable variation you find, i.e., if the ETF is so popular and so big and so heavily traded that there's little useful variation in the volume over time, why plot it?

 

Db

[DbPhoenix 42]

-

 

I'm copying this post here because (a) it has particularly to do with volume and (b) it is a point that is often missed:

 

Originally Posted by PrymeTyme »

well , first i probably would have taken a short at the retest of broken support (24) , as we have a nice selling wave accompanied by increaseing vol. , then on the retest we see that vol actually drops off! , so i would have taken a short there . . .

Consider the following, and while I've pointed it out before, it rarely sticks.

 

Price and volume tell two different stories. That they have been joined at the hip by vendors is unfortunate, but to separate them, surgically or otherwise, is not an insurmountable obstacle.

 

Price tells you what the balance is between buying pressure and selling pressure. If buying pressure has the upper hand, price rises. If selling pressure has the upper hand, price falls.

 

Volume tells you how hard buyers and sellers are trying, but it doesn't tell you squat about who's in charge.

 

And that's it.

 

Rising volume on a move downward is not a negative. Rising volume on a move downward tells you that buyers are rushing in to retard, stop, or even reverse the move downward. Whether or not they manage to do so is beside the point. Without the buyers, there would be piddling volume. When price reaches THE bottom, volume may be high or low depending on how much more effort is required, but the volume itself does not signal the bottom. The bottom is signaled by the fact that price is no longer falling.

 

As for high volume to the upside, this is not necessarily a positive, either. The positive is that price is rising. The volume simply tells you how much effort buyers are putting in to move it. If volume is high, they're facing a lot of resistance. If it isn't, they aren't, i.e., sellers are not fighting the rise, for whatever reason. What matters most to the trader, however, is that price is rising. Who cares why?

 

There are a number of important points to this example, but what is perhaps most important is that buyers managed to push price back to the level at which it fell. Not only that, they were able to provide a higher low.

 

Volume, therefore, can provide useful or important or even necessary details, but it's the harmony, not the melody.