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Importance of Volume

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Trading Experience: Beginner
Platform: NinjaTrader
Broker/Data: InteractiveBrokers
Favorite Futures: NQ
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Posts: 594 since Aug 2015
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There is no right answer as it truly boils down to the trader.

Personally I think volume is extremely important, and it plays in role in every single one of my trades.This is because it gives you another dimension of the market so it can make for a better educated decision.

Think of price and time as 2 dimensions, volume would be the 3rd.

Here's an example of how volume helped me today.
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Top left shows volume profiles. This is a volume count per price level. This can show you the different areas at which a lot of contracts are executed at a certain price. There's high volume areas that show there's perceived value from buyers and sellers, and the opposite as well. This can help set support / resistance areas as well.

The main screen on the right shows the RTH session with volume profile for the RTH, at the bottom of it you can see the total volume count per 5 minute wicks.

My note shows higher volume as as price is going down. Also note how high the volume in the current timeframe is despite only 1 minute taking place, apart from the open this ended being the highest volume we saw in the day. In this particular scenario my speculation was that the move is running into more buyers so it requires a lot more strength to keep going than it did 10 pts earlier. The top left shows that volume is starting to consolidate which can also indicate that buyers aren't letting the price drop too much further.

For my particular setup, it shows me that the move is slowing down, buyers are starting to step into the market, and a reversal is likely. So the choice based on my system is to take a long trade expecting the market to reverse.

If you look at price and time alone, you don't see signs of reversal in that picture, and you are left hoping that support / resistance will hold without much indication. Understanding volume gave me that extra edge to enter into the trade. Combined with the other things I look at, it made sure it was a good setup.

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Shortly after, price starts to show signs of a reversal. There were times when I wanted to exit the trade but looking at volume and the volume profiles combined with price and time, I saw no signs that I should exit the trade.

Eventually the entry paid off and this turned out to be a successful trade.
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So that's an example where volume helped me get into a trade.

Here's an example of where volume helped me not enter a trade, also from today.
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In my trading plan I said I was going to look for a long entry at ON low which is the purple zone. Price and time wise things looked okay. It hit the zone and then it left a wick, some would say that's a sign of reversal, but is it strong enough to enter?

When you look at the volume profiles I see that big orders are being filled fast and yet the price still comes down aggressively, and the overall profile looks like a high volatility bear profile (from my experience). Also the volume count at the bottom doesn't show increased volume at this area. Overall it was a pretty easy trade to pass, which would've been a loss had I taken it.

I've got a lot more examples in my journal if you want to check out how I use volume.

Like everything else in trading though, volume takes practice to read. And requires discretion as to whether volume should be prioritized when making a trading decision.

The way I look at it is without volume I see a square, and I'm expected to make a judgment call as to what the object is. I'm not seeing the entire picture so it's difficult to make a correct decision. However if you add the 3rd dimension, you can see the shape quite clearly and have a better idea as to what object it could be.

Long, but I hope it makes sense.


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