[volume] Questioning the Volume Sales Pitch

[littlefish 10]

If I have an order for one contract one tick above a previous high and another party buys or sells to me filling the order making price trade that one tick higher.

 

Does my one contract purchase/sell agreement between another just like me have the same authority to move the market one tick as an agreement between two for 1000 contracts?

 

If a one contract agreement between two participants (or even outside forces) has the ability to make price trade higher or lower, the same as any other size, would one's focus on volume be beneficial or a distraction from what price itself is doing?

[littlefish 10]

Must not be getting any bites.

 

I also question a few more things related to this. If any size trade has the ability to move price up or down one tick, then wouldn't it be true that it would have the potential of triggering any stops that are at that level no matter their size?

 

What about the BIG moves that markets can make overnight on low volume? Is it the volume size that makes the big moves or the individual trades no matter their size at each given price change?

 

Would this not render a lot of 'large' individuals a lot less powerful than they would have you to believe about themselves and actually render the market a level playing field no matter how big you are?

 

If the trades no matter their size establish price, then that would mean if someone thought a market was a good buy at said price and bought 1000 contracts (assuming there was someone to sell to him 1000 at that exact tick), and three more came along selling one contract each. As long as their were ones who agreed to the transactions below the big guy's net long position. He would be in the red two or three ticks. Then if the three little ones forced a domino effect below his entry, he would be forced out of his position.

 

How can it be proven for a fact that a large volume position in the market actually supports it? Is it possible that it does not once it's established and that the only thing that does are orders actively being placed and triggered at levels no matter their size?

[clmacdougall 11]

  littlefish said:

Must not be getting any bites.

 

I also question a few more things related to this. If any size trade has the ability to move price up or down one tick, then wouldn't it be true that it would have the potential of triggering any stops that are at that level no matter their size?

 

What about the BIG moves that markets can make overnight on low volume? Is it the volume size that makes the big moves or the individual trades no matter their size at each given price change?

 

Would this not render a lot of 'large' individuals a lot less powerful than they would have you to believe about themselves and actually render the market a level playing field no matter how big you are?

 

If the trades no matter their size establish price, then that would mean if someone thought a market was a good buy at said price and bought 1000 contracts (assuming there was someone to sell to him 1000 at that exact tick), and three more came along selling one contract each. As long as their were ones who agreed to the transactions below the big guy's net long position. He would be in the red two or three ticks. Then if the three little ones forced a domino effect below his entry, he would be forced out of his position.

 

How can it be proven for a fact that a large volume position in the market actually supports it? Is it possible that it does not once it's established and that the only thing that does are orders actively being placed and triggered at levels no matter their size?

 

I find myself asking the same questions you have, especially, "What about the BIG moves that markets can make overnight on low volume? Is it the volume size that makes the big moves or the individual trades no matter their size at each given price change?"

Maybe volume is a liar.

Specific markets seemed to control themselves dictating their own value in the past, so the players who traded that single market had control over it's perceived value. I wonder if those days are over.

Markets are reactionary now more than ever. When the ES moves through the night on low volume it is no less important than when it moves on high volume throughout the day. It is moving , be it on low or high volume, in response to whichever stock market / currency pairing at that specific time has control over the perceived value of goods produced.

When volume comes into a market has the perception of value changed? This is the only question which seems to matter.

What makes volume studies difficult is the repetitive nature of volume to look the same everyday, creating a "U" shaped pattern everyday in the ES.

It seems like instead of seeing volume prove value, we're watching portfolio's , "reacting," to the present reality of price. And if that statement is true than price, ( minus volume ), is the only true understanding of value that we have.

How's this for a step further, " all movement is commercial activity." Do you really think that any movement is going to be allowed outside of what the commercial traders want to have happen. It's a waste of time to try and split hairs over commercial /non-commercial activity.

The only thing we seem to have left is an indepth study of market structure / price movement in a timeframe which is not lagging but is in touch with how the maket decides what value "now" is.

[littlefish 10]

  clmacdougall said:

Maybe volume is a liar.

 

Or, maybe volume is not a liar but rather cancels itself out. For every buyer there is a seller. If a thousand contracts trade at a given price increment, the market would see that as a hedge. Right? That price increment becomes fair value. Right? At which point the amount traded at that price becomes history and has no influence on the present or much less the future. Right?

 

So then how would price advance higher or lower from that point, putting either one or the other at a profit or loss? History would have to repeat itself again. A transaction (buyer and seller) no matter their size would have to establish a contract agreement at another price level creating fair value yet again. Right?

 

  clmacdougall said:

How's this for a step further, " all movement is commercial activity."

 

If every price change is fair value, who cares who's activity it is?

 

  clmacdougall said:

Do you really think that any movement is going to be allowed outside of what the commercial traders want to have happen.

 

By what means would 'they' allow or disallow anything in a zero sum level playing field?

[Tams 20]

  clmacdougall said:

...

What makes volume studies difficult is the repetitive nature of volume to look the same everyday, creating a "U" shaped pattern everyday in the ES.

....

 

 

That's the lunch time lull...

[thalestrader 14]

Here is my experience with volume: When buying stocks to hold for more than the day, a pattern of rising volume indicates that mutual funds and professional investors are taking positions. This is good, for individual issues of common stock will only increase in rice over weeks and months if professional buyers continue to buy the stock. Price is still its own leading indicator.

 

For day trading, I have yet to see anyone demonstrate in real time how they use volume to make a trading decision that could not have been made by watching price alone. There are, of course, those who purport to use volume as a leading indicator of price, and some go so far as to say you could "almost" trade based on the volume histogram alone without the price pane. But, in the end, even they are trading price action, and not volume. Not that there is anything wrong with that, I just wonder why the reticence to admit that price is the determining factor.

 

Perhaps some have been able to use volume as a tool to aid them in making trading decisions; and if you have found that volume helps you, that is wonderful, and I would not want you discourage anyone from using that in which he or she has confidence.

 

But from what I have been able to determine, intraday volume, if it measures anything, measures relative liquidity, which is not the same thing as "buying interest" or "selling interest."

 

The best indicator of buying interest is a steady pattern of higher highs and higher lows in price, while the best indicator of selling interest in a steady pattern of lower lows and lower highs in price. I have done very well buying new session highs and selling new session lows, regardless of whether I had a lot of company at the moment I was buying or selling. In fact, one of my best trades ever was a long natural gas trade where there were a grand total of 16 contracts bought on a breakout when I bought.

 

All of them were mine, the lone piker.

 

Best Wishes,

 

Thales

[clmacdougall 11]

Would I be correct in saying that the, "lack," of volume in either an upmove or a downmove when compared to a large price range accomplished is the only telling factor of trading sentiment.

The reason being that demand overwhelmed supply ( or vice versa ) so quickly that large price moves were able to occur on low volume as resistance to the move was not able to stand in it's way in sufficient enough time to delay/slow it's momentum.

In effect the most telling part of sentiment is an "ease of movement" for price when compared to the struggle through either buyers or sellers which happens in another equal price range. Thus low volume large price ranges are telling of true sentiment and high volume similar price ranges are paramount to indecision.

[littlefish 10]

  thalestrader said:

In fact, one of my best trades ever was a long natural gas trade where there were a grand total of 16 contracts bought on a breakout when I bought.

 

All of them were mine, the lone piker.

 

That's a very fine example of what I was questioning to begin with. Since it was you and only you who traded the tick above the high, even if you had traded one contract, you and the one who sold to you established the breakout. No matter how big the existing short positions were under you.

 

My argument if any is that it may be (or it is from my line of sight) a serious error to think that just because big volume has hit the market that it somehow 'holds' it up or down. My argument is that if each price change consists of an equal buyer and a seller, no matter the size, it becomes a neutral point creating no bias in either direction. That it is such a level playing field that a small player even at one contract can set into motion a change in the entire market no matter the size of the positions above or below it. :missy:

[BlowFish 10]

In your second example (original post) it would take 1000 'littlefish' or one 'whale' prepared to trade a 1000 contracts 1 tick above the high. If one thinks that is significant (or more significant than the 1 lot traded) will likely determine how one answers the question.

[littlefish 10]

  BlowFish said:

In your second example (original post) .. snip

 

So let me fabricate a market price (tape) based on the picture that is in my head in order to attempt to clarify what I was asking and you explain to me what exactly you mean with your reply in relation to this.

 

Market opens now for first ever time valued at 10.

 

>>> 10.00;1000

 

One whale feels lucky and buys 1000 and another sells 1000 to him. Both enter a zero sum agreement. One betting the other is wrong at $10.00. Could also be one whale buying from a thousand little fish at 10.00 or a thousand little fish selling to/buying from** one whale too.

 

Since an equal amount is exchanged between the two parties the market is now neutral and somebody has to agree to do something at either 10.25 or 9.75 to make it move, correct or incorrect?

 

Since the gain and loss is exchanged (traded) between the two equal parties, how will it have any affect on 'holding' price anywhere, now that the position is established?

 

Price is established now. How can it affect future price if it's a hedge between the parties who traded at 10.00 and that's it?

 

>>> 9.75;1

 

two little fish agree to buy and sell 1 at 9.75 putting one whale in the red and the other in the green.

 

>>> 9.50;1

 

history repeats and the previous little fish who bought from the other gives/loses .25 to the little fish who sold to him at 9.75.

 

>>> 9.25;1

 

history repeats

 

>>> Now nobody wants to trade above 9.25 for some reason and now the whale who sold to the other whale has scooped three ticks from his account courtesy of the three mini agreements between the little fish below them.

 

Is there anything impossible about this picture I have just painted?

Edited January 4, 2010 by littlefish
marked**

[DugDug 10]

Personally I agree volume is neutral as for every buyer there is a seller - there are never more buyers than sellers - just more aggressive ones. I think Thalestrader summed it up nicely, and I think that volume needs to be seen in context and may be used as an additive filter - but you cant trade off it.

 

I can give a few examples that volume definitely caused the market participants to be confused/mislead, and is usually the top or bottom, regardless of the volume.

 

One - a normally liquid stock, ( in the good old early days though I am sure it happens today) showed no sellers, only a rash of buyers jumping over themselves. There are no trades, hence no volume. Being naive at the time, I sold stock. It turned out to be the high for about two years and collapsed quickly. But volume was very low with many buyers, no sellers.

two - a normally liquid stock had one massive seller over the course of a month, selling volume at a limit price. For days, people bought and bought. Finally when the market thought the order was over the stock popped, for about 30 mins, it then proceeded to collapse, eve though the original seller had actually finished. Volume was very high, with one seller, and many buyers.

three - There was an stock whereby the option traders were all lining up to buy the stock at a certain level. The volume would have normally covered about two months turnover and provided support. It did for a day or two, but then once more aggressive sellers stepped in the buyers were no longer there. Potentially massive volume, but only transacted at a lot lower price where the many buyers and sellers actually agreed to transact.

 

(I am sure of many other examples - particularly concerning stocks as there is a limit based on the issued shares of a company - unlike futures.)

 

The point being that it was the context and the market price that ultimately set the agenda, not the volume.

[Tams 20]

  littlefish said:

So let me fabricate a market price (tape) ...

Is there anything impossible about this picture I have just painted?

 

 

 

you have neglected the Bid and Ask.

 

There is only ONE trade price,

 

but there were a Bid price and an Ask price before the trade,

 

and

 

after the trade, the market reverts back to 2 prices -- a Bid and an Ask.

[littlefish 10]

  Tams said:

you have neglected the Bid and Ask.

 

Based on my tape, would it be wrong to say then that there was more weight on the bid than the ask (nobody wanted to do business at 10.25 only at 9.75)?

 

And that's what started the move. Is this possible?

 

The simple question that I am trying to establish an answer for, in apparently a very complex way is. Do large positions after having been established actually have market manipulating power and if so, what is the supporting evidence? Or is the playing field level, no matter the size?

[BlowFish 10]

It might help for you to express "the simple question that I am trying to establish an answer for," In specific terms. Not being facetious here but you have given a couple of examples but I am not completely sure exactly what they are supposed to prove or disprove (a bit of scepticism is usually healthy btw). Are you talking about any sort of volume analysis in particular?

 

In some instruments volume is highly correlated to range for any constant sample size. Whether that is useful information or has anything to do with the 'volume sales pitch' I couldn't say.

 

Volume Weighted Average Price (VWAP) is a very useful measure used by all sorts of institutions for a variety of purposes. Perhaps one of the most common is to rate traders performance though it is a common input into algorithmic systems.

 

Some people swear by market delta type indicators (vol@bid vs vol@ask) as a proxy for order flow. Lets not even get into market (or volume) profile.

 

I am pretty sure that there are a whole bunch of 'pro' traders that find volume pretty darn important, I am sure there are many that don't too (though liquidity nearly always becomes an issue for the real top guys and that's closely related to volume). The fact that some slippery snake oil guy is selling something or other based on volume doesn't automatically invalidate 'volume'. By the same token just because someone trades successfully with out it doesn't invalidate it either.

 

I am not sure what your motivation is? Did you buy the pitch but are having doubts and want someone to talk you out of wasting time studying volume further?

[Tams 20]

  littlefish said:

Based on my tape, would it be wrong to say then that there was more weight on the bid than the ask (nobody wanted to do business at 10.25 only at 9.75)?

 

And that's what started the move. Is this possible?

 

The simple question that I am trying to establish an answer for, in apparently a very complex way is. Do large positions after having been established actually have market manipulating power and if so, what is the supporting evidence? Or is the playing field level, no matter the size?

 

 

don't just look at the bid price and the ask price...

 

look at the bid size and the ask size as well...

[littlefish 10]

  BlowFish said:

(a bit of scepticism is usually healthy btw). Are you talking about any sort of volume analysis in particular?

 

Yes any analysis where the pitch man proclaims that an instrument is 'bought up' or 'sold down'. Or somehow manipulated by 'larger players'.

 

How can something be manipulated with buying power when at every single last traded price there was an equal seller selling to them?

 

  BlowFish said:

I am not sure what your motivation is?

 

To pretty much spark thought concerning the sale of scare tactics which can lead many to fear something that doesn't even exist to begin with.

[DugDug 10]

  littlefish said:

 

How can something be manipulated with buying power when at every single last traded price there was an equal seller selling to them?

.

 

also you wrote....

Do large positions after having been established actually have market manipulating power and if so, what is the supporting evidence? Or is the playing field level, no matter the size?

 

You have answered it yourself.........its about manipulation - the illusion. Just because someone says or shows they are bidding for volume does not necessarily mean they are a buyer. They are probably trying to push the price up to enable them to sell it.

It is a level playing field in that you can choose to participate or not, choose your own style and strategy and choose to incorporate volume, indicators, price action, fundamentals - or all of the above.

 

eg; check out http://www.traderslaboratory.com/forums/f34/price-volume-relationship-6320.html

 

Yes - people are always trying to manipulate prices to suit their positions. upticking, downticking, bidding and offering - big and small players.....etc; etc;

 

Larger players would not want to give away what they are trying to do until they are set in their position. Usually whilst the bigger players can support prices - to a degree, they are generally in the position of having to buy and sell when they can, so they will sell into buyers, and buy into sellers.

 

Ultimately - the market will still go where it wants to - not because one contract traded at a price, or a 1000 traded there. Thats why people use averages, VWAP, typical prices, weekly averages etc;

 

Regards sales people......For any person who proclaims they know where the smart money is, the big players etc......I think thats rubbish.

 

example; long term trend traders have great returns on sizeable portfolios over the long term. Yet they are probably wrong on 70% of their trades. Are they smart or dumb?

If you are a salesperson with the ultimate trading system - guaranteed to make money- that uses volume analysis (or anything else) and you sell it to people. Is that smart or dumb?

 

One last thought - the Hunt brothers - Silver market in the 1970s

Edited January 5, 2010 by DugDug

[BlowFish 10]

  littlefish said:

Yes any analysis where the pitch man proclaims that an instrument is 'bought up' or 'sold down'. Or somehow manipulated by 'larger players'.

 

.

 

Ahh OK I would be wary of those terms as well, however that does not mean that someone that has a large line to accumulate might not sell whilst they are accumulating If you wanted to buy a large position in xyz consider how you might do it without bidding up price on yourself?

 

Have you read Reminiscences of a Stock Operator? One of the best books ever written about trading and speculating (if not the best book ever written). It clearly illustrates some of the issues facing traders moving large positions around and how they deal with those issues. No 'manipulation' just normal common sense ways of doing business. No rhetoric nothing to sell (being written 70 or 80 years ago) It's a cracking book on many levels, a classic.

 

If you want to get serious about your study of exactly how and why people buy and sell get a good book on market micro-structure. Harris or O'Harra are probably your best bet. You could also do worse than take a look at DBPhoenix's stuff on supply and demand.

 

Incidentally manipulated is not a useful word and impedes meaningful discussion. Why? I hear you ask. Well it has two distinct definitions one that simply means to operate skilfully, the second however adds unfairly to the definition. Of course this is exactly why it is liked by the marketeers.

 

  littlefish said:

How can something be manipulated with buying power when at every single last traded price there was an equal seller selling to them?

.

 

I don't think we can have the discussion about how participants pursue there objectives until you explore how a continuous auction works and how supply and demand is likely to impact prices within the auction. Something 'being manipulated by buying power' makes little sense to me. There are various maneuvers available to traders seeking to accumulate or distribute inventory but that does not really describe any.

 

As price moves around buyers become sellers, sellers become buyers, sidelined players enter, and yet others traders, exit. Put another way on each side of your trade can be someone buying to open, buying to close, selling to open, or selling to close. There is a good chance that they are motivated by price (though a whole bunch of participants are not). That trade might complete there quota or they might have another 1000,000 to cover. So it could be argued that all is not equal. Seems that you are looking at single piece of the jigsaw and saying hmm I can't see the big picture. Not only that it is a piece supplied by a guy with a sales pitch and so is not even from the real puzzle.

Edited January 5, 2010 by BlowFish