I currently trade the ES. Which trades overnight. I was originally going to ask when I should consider my indicators reliable if I trade in the day time in the US. It just seemed that lower volume overnight activity might be viewed differently than higher volume NY market activity. It occurred to me that most, if not all, indicators based on price movement presume a uniform volume level. So that raises the question of whether most indicators would be better if weighted against volume. For example would a volume weighted MACD be more reliable and useful than the standard one. Or does price movement itself weigh in volume already in some way I am not thinking about.
I was thinking about this because being only moderately experienced I prefer trending trades. I like to see a trend, confirm it, and hop on as fast as I can. So I like ADX and a few other indicators. But I wonder can I consider it a reliable signal in the morning, when I see a trend, or infact any indicator, that is based on the overnight data and does not include volume weighing. Should I try to reweigh all my indicators myself. Or is this really not significant?
If the market trades very strong overnight and gaps up 10 ES handles at the cash open, do you place less significance on that than if the market traded up strongly during yesterday's cash session and then did very little overnight?
There is of course no right or wrong; why not try what you are suggesting and see what you find? You will either find it useful to some degree, or not, and then you will have done the research and work yourself and you will be convinced of your own findings. Best of luck!
It is certainly true that much can be gained doing ones own research and analysis. But that needs to be balanced with acquiring what is already known by others. It took me till my mid thirties to learn that the best way to achieve competence in an area was to find an expert and then do what they say. At least at the start.
I don't mind doing my own research. In fact I do a lot of system analysis. But I also want to avoid "discovering" things that are commonly known by those with greater experience. I probably can't answer the volume issue completely. However I can work on the issue. If I use ADX as a trend indicator. I can see if the trend lasts longer when the signal occurs in a higher volume period or a lower one. Ceteris paribus, that should prove if a relationship to volume exists. Maybe over the weekend I will try.
Cheers and thanks for the reply
The thing is, 10 experts in trading will give you 11 different answers on this. But I do understand what you are saying. Some volume-weighted indicators are already out there; volume-weighted moving averages (VWMA's) are pretty common already, for example. I have not done this for something like a MACD, but that's because I do not use indicators like this. I use VWAP though, and other volume tools extensively in my trading, but have not volume-weighted typical indicators because I do not find them to be useful to me personally.
I would not fancy myself an expert, so take this at whatever value you like. In my opinion, you need to compare apples to apples. Doing this with volume is difficult, because volume varies predictably depending on the day, time of day, or even season. IMO it will do you no good to volume-weight an indicator that is used overnight as well as during the cash session. Volume is always low overnight, always floods in at the open, always decreases late morning through lunch, and always picks up the last hour or so. By how much varies, but it is always the same. So what benefit do you get by using a variable to compare overnight with RTH which is not really a variable at all, but is, for all intents and purposes, a constant?
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To give a counter-example, one way I use volume is to compare quantities a few minutes apart--this gives a good indication of relative volume, as time of day is not much of a factor then (contrast that with comparing volume at 9:35 and 12:35, where time of day is a huge factor). Also, when volume does NOT behave quite as above (for example, if the first three half hours of the cash session have the same level of volume), then this is a useful deviation from the norm. Also, comparing the volume that has been traded in the first hour to the volume traded in the past 20 days in the first hour is a useful comparison, because you are comparing based on a time of day when you expect roughly the same amount of volume, and a deviation from this can be a useful piece of information.
So, any indicator which you would volume-weight is likely to fall victim to a time-of-day issue. It won't be "wrong," just understand that a volume-weighted indicator will place more weight on data at 9:30am than it will on data at 11:45am; it will place more weight on data at 10:00am than it will on data at 2:30am; and it will do this every time, which begs the question, why do it?