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Importance of Volume

  #27 (permalink)

London, UK
Trading Experience: Master
Platform: sierra chart, Jigsaw Trading, Bookmap
Favorite Futures: 6E futures, Cable
Posts: 93 since Aug 2012

Narcissus View Post
I am a fan of volume studies. I am also a strong believer that volume changes often happen BEFORE price changes.

My favourite indicator is Equivolume indicator where the width of the price bar is adjusted according to the volume traded. It gives a better feel for the validity of price moves.

I also use average tick size which helps me to differential small vs big players locations.

Example from Friday. Gap up open but minute bars and tick bars show very narrow bars above 2042 i.e lack of buyers. That would have been a good place to short or take profit if you are long Overnight. I was bullish and hence didn't attempt short though.

1 minute bar
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1000 tick bar
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First area of support at 2135 weekly vWAP- red square area - shows bigger players stepping in but no follow through. Sellers dominance continues with a big volume bar and selling goes on until 2127. Eventually big buyers step in with a retest and then back to vWAP. (Though I went long at 2132 and 2127, I didn't exit at right locations and trade management is another big piece in this puzzle)

I don't mean to complicate the concept of volume. It's just how I see the market and try to understand what's going on. When I apply this intra-day information with overall market internals, I feel like I am in-sync with the market. The only thing that is not happening yet is consistent profitability.

Very true regarding your first sentence and volume. Equibars is a good way to visualise volume too, thank you for sharing. Now with the volume with have one part of the equation and this is why key levels help us knowing what is more likely to happen. You mention a weekly VWAP, very good example of a key point. There are 2 elements to take on board when you see high volume like that in a bar, and the first and main one is to gage whether or not Limit order are going to absorb this high volume, or if instead Limits are going to be chewed through. If there is absorption, prices will go no further, and may or may not reverse. If there is no absorption and Limits get chewed up, then the inside bid/ask will go higher to find liquidity and the prices will move up. This is why watching Limit orders on a DOM is rather important. The fact that they are fake Limits/spoofing/front running/ping orders/quote stuffing/layering/etc is one thing, still, there are true limit orders who are here to be executed and/or to ring liquidity to the market as they are rewarded to do so on both side. And with practice and the right tools, a trained eye can tell, when it is likely to be real liquid or not, and at the very least, observe it and be ready for either option. This is the only mechanism that make the market tick up and down.
The 2nd element, is to gage whether high volume is most likely say high volume lifting the offer as there is a real conviction to go higher, so high volume with intent and aggressiveness, or if this is buyers getting out of short trades. We never know this for sure of course and it is always a combination of both, but having a better idea of what is most likely will help to understand the likelihood of Market orders (what we call volume since the beginning of the thread) being served by Limit orders (absorption) or if they will need to go to subsequent levels to be executed.
And likelihood is measured partly thanks to key levels. On a weekly VWAP there is likelihood for longs getting out of shorts for example. Getting out of a trade is not an agressive intent. It is urgent but will not be followed through (although other might join the move but let's keep it simple for now).

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