I had to annotate this chart and post it, as here is a picture perfect example of how volume can be useful, and why the context is so important. This is just my analysis so take it for what you paid for it.
The first super high volume area shows price stalling with a heavy increase in volume. This could be interpreted by some as exhaustive, and sign of an immediate reversal. However, in this case price rises right after. Why? Because the high must be tested. There is an immediate target. It doesn't matter that buyers have been "exhausted," because momentum is pushing up, and buyers will test the high. Thus, a few remaining buyers push it up and test the high, where then it falls because NOW buyers are exhausted. There simply isn't as much interest in pushing it higher, so it falls rather on its own.
The second high volume area is different. Why don't prices rise after this area of high volume? Because we are AT the high. Target reached. No more interest in buying at this point--THIS is exhaustive volume. There is not as much momentum here because this is the third attempt and buyers are all absorbed, at least at this point. Could price have risen higher? Of course. But with such unusually high volume for this time of day (300-500 contracts per minute at 11:30PM ET), there simply aren't that many people or computers willing to buy.
This is my take on why context is so important when we talk about volume and whether the volume indicates "healthy participation," or whether it indicates absorption and a reversal. If you have another interpretation I would love to hear feedback from others!
The following 3 users say Thank You to josh for this post:
After @Michael.H and I talked about making some videos to show order flow and what we see on the market, I decided to go ahead and post one. I'm sorry I don't have a microphone.
This was done today in marketreplay on the 6E when I saw buyers entering the market. The image is kinda vertical and the windows look stretched up...need to work on that on the next one
Market replay doesn't show exactly what I see in real time while trading. It's more clear when I saw it trading than when I made the video.
This is the second trade I made today. Also tried to make a video from the first one at 07:46 (GMT-1) where I also went long but it was even less obvious in market replay and no, I don't know why this happens.
1. I try to identify buyers/sellers coming in with the ladder + CVD.
I basicly try to see the cumulative volume delta (or comulative delta volume, call it what you like) going down while price stalls or moves up. The more selling volume i see coming in without price moving accordingly on the same direction, the more confident i'll be going into the trade.
This is not easy to see as it sometimes happens in a blink of an eye (yes, very fast) and it doesn't happen very often. To help me gauge the pressure of price vs volume I use GOMCD with updowntick.
This is like a microscope, very fine detail.
2. After having identified the dominant player, I look for a break of previous support/resistance and place a stop (see the vid). I use the 6range chart for context but I usually identify support and resistance with a 4range chart because the move can be quite fast.
This isn't easy to see or explain but hope you can see it on the vid.
P.S. - will try and post some more if I can find trades that are clear enough.
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I am unable to look into the microscope details with GOMCD package(I am using NinjaTrader with GOMCD).
All the GOMCD indicators are display with usual scale on new panel.
How to get the middle chart display with data on the candlestick chart?
The following user says Thank You to EK1288 for this post: