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Importance of Volume
Started:October 7th, 2016 (08:15 PM) by phyoko Views / Replies:1,859 / 37
Last Reply:October 17th, 2016 (12:18 AM) Attachments:9

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Importance of Volume

Old October 7th, 2016, 08:15 PM   #1 (permalink)
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Importance of Volume

Why the volume is important to trading and how can I use it correctly?

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Old October 7th, 2016, 08:15 PM   #2 (permalink)
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Old October 7th, 2016, 08:34 PM   #3 (permalink)
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phyoko View Post
Why the volume is important to trading and how can I use it correctly?

Volume is not necessarily important in trading. Some people use it others don't. It is definitely a very secondary data point, I would suggest other info is more important such as support/resistance, prior highs/lows etc. Price is the most important by far obviously.

I personally don't use it so I cannot tell you how to use it correctly other than to confirm a move as it sometimes precedes, price moves. But for me it is not reliable enough to bother with (I trade index futures).

Hopefully someone that uses volume can chime in...

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Old October 7th, 2016, 10:47 PM   #4 (permalink)
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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.
https://futures.io/trading-journals/40312-softsoap-s-nq-nasdaq-100-futures-contract-journey-softsoap-softgold-13.html

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.

Cheers.

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Old October 10th, 2016, 12:44 AM   #5 (permalink)
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Volume is not that important to a lot of profitable traders

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Old October 10th, 2016, 12:55 AM   #6 (permalink)
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Seahn View Post
Volume is not necessarily important in trading. Some people use it others don't. It is definitely a very secondary data point, I would suggest other info is more important such as support/resistance, prior highs/lows etc. Price is the most important by far obviously.



I personally don't use it so I cannot tell you how to use it correctly other than to confirm a move as it sometimes precedes, price moves. But for me it is not reliable enough to bother with (I trade index futures).



Hopefully someone that uses volume can chime in...


And what creates support and resistances, prior lows/highs (to keep the same examples) if it is not volume? Volumes is just the amount of contracts exchanged between buyers and sellers, which is the only thing that makes the market move, which creates how/lows, resistance and supports, so even if you are not looking at the volume profile, you are still looking at volumes :-)


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Old October 10th, 2016, 02:17 AM   #7 (permalink)
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Volume : The other dimension

As @dom64 already mentioned, even if you are not consciously using volume in your trading strategy, you are actually using it without knowing it. Volume indicates the places where prices are either accepted or rejected in the auction process. Do yourself a favor, if you are using Ninjatrader, just add the standard volume profile indicator to one of your charts and see how the market 'respects' the volume levels on it. Support and resistance, which most traders use in some way or form, is created by the volume traded at those levels.

My personal take on using volume in your strategy is that I would rather like to know more about why prices are moving than less. If you crack open just one bar on your chart to see the volume within it, you will be amazed at how much information you can glean from the volume in that bar.

Having said all of that, I think that trading is a very personal thing. You have to find a strategy that works with your personality and how you process information. As previously mentioned there are many traders that are profitable without using volume in their strategies. I can bet you though they are aware of volume and how it influences the market.

If you would like to learn more about using volume in your strategy, FIO is a great place to learn about it. Journals like @SoftSoap and @JonnyBoy would get you well on your way on using volume to be a profitable trader.

Good luck with your journey,
Popsicle

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Old October 10th, 2016, 10:32 AM   #8 (permalink)
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A lot of traders focus only on price. But remember this - in order for a price to actually hit the tape, there must be volume.

Without volume, there is nothing.

Sounds kind of dumb to oversimplify things like that but it's true. Price is irrelevant if no one is willing to actually buy or sell there. And an astute observer can glean a lot of valuable information by watching volumes.

Try this for a simple experiment: look at your favorite instrument on a simple intraday chart, identify where the best reversals occurred, and then look at the volumes underneath those reversal bars. Notice anything

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Old October 10th, 2016, 10:37 AM   #9 (permalink)
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Bladesmith View Post
A lot of traders focus only on price. But remember this - in order for a price to actually hit the tape, there must be volume.



Without volume, there is nothing.



Sounds kind of dumb to oversimplify things like that but it's true. Price is irrelevant if no one is willing to actually buy or sell there. And an astute observer can glean a lot of valuable information by watching volumes.



Try this for a simple experiment: look at your favorite instrument on a simple intraday chart, identify where the best reversals occurred, and then look at the volumes underneath those reversal bars. Notice anything


Very true.. I don't think it is dumb or over simplified. There is nothing such as "price". A "price" is an agreement of fair value for a given instrument at a given level and point in time. When buyers and sellers agree, they deal together, contracts are being sold/bought, this is called volume. Price doesn't create volume. Volume make the price and makes it become "alive" and causes the price to move up and down.


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Old October 10th, 2016, 05:47 PM   #10 (permalink)
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phyoko View Post
Why the volume is important to trading and how can I use it correctly?

This is a loaded question. Most people do not consider volume data to be important.

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