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How to use volume in your trading
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How to use volume in your trading

  #631 (permalink)
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josh View Post
What you are talking about here is not really about tape reading, though Wyckoff was a tape reader (in a very different time I might add, when prints would come across the wire every 30 seconds or over minutes, compared to today, where they come by in milliseconds). It's a Wyckoffian perspective on volume analysis, and I use this extensively--this was my trigger for entry on the trade I posted. I think that the principles of accumulation and distribution are logical and therefore timeless, so they will always have some validity in the markets. What I do not adhere to is Wyckoff's "smart money" and "internal operators" lingo. It takes my focus too much off of what is happening, and puts it too much on who's doing it. I really don't care who's doing it--the fact is, if price moved up, demand was greater than supply, and vice versa. IMO it complicates the issue at hand by attempting to assign labels to market participants.

Okay, just googled Wyckoff for the first time. It is nothing like I learned through Tape Reading and Market Tactics by Humphrey B. Neill. Wyckoff's method seems extremely complex and overly descriptive... like a science with rigidity and rules rather than an art


Quoting 
I can understand on the longer time frame (daily to weekly) that the labels may be appropriately assigned, as investors enter and exit the market systematically. But I do not see every volume spike on a 5m chart as activity by "smart money." I've seen people using 100 tick charts that span a grand total of 10 minutes talk about "accumulation and distribution," and taking it to that extreme is too much, IMO. But the principles work on any time frame, and that's the key for me--I just don't personally like to presume to understand or know the intent of the trader. I use volume, I use delta to some degree, and moreover I use price--who does it, for what reason, is not important to me.

I apologize, if I confused you by the terminology smart money. I had never heard of Wyckoff's differentiation until today. By smart money, I mean large traders who can move markets. When a 5 minute chart shows a large spike, it means that large traders see value in getting into or out of the market. When large traders get in or out of the market, the rest of the market is at their mercy.

As for your comment about 5min volume spikes, I just want to reiterate, it is all relative. A 2,000 share order will have a different effect on Cisco's stock that it will on Apple's stock. A large contract trade hitting the tape on the open will have a different effect than hitting the market during lunch time.

A spike in volume means big players just jumped into the fray that were inactive before because now they see value in entering/exiting the market. That doesn't necessarily mean enter a trade ASAP, but it does mean capitulation might be just around the corner.

Quoting 
On your annotations, I do not see the 3rd or 5th boxes as any kind of significant volume activity indicating accumulation or distribution. The context is the important aspect here, and the 4th box (the trade I took) had the important context of being a channel line test. The 12:26 bar (the last high volume bar in your first red box) is the significant bar in that group, as the support held, and then price moved up. It very well could have moved down, and that volume would have represented accumulation by longs, which then likely would have bailed and fueled a further move down.

The 3rd box is admittedly ambiguous and indecisive. To be honest, in real time it would have likely been too much of a whipsaw/headfake to trade logically. However it is definitely a point of interest if you look at the amount of volume that was being traded at the time. The standard volume for a candlestick at the time was like 250k and then all of a sudden it shoots to almost 3x that when a bottom was attempted to be put in. The reason the trade was ambiguous and low probability is that the first bar was faded by the second bar and both bars had heavy volume. That signifies that there is still indecision between the large traders as to the price direction and so the markets are volatile and not worth entering. There was either a bunch of large buyers that came in immediately after large sellers were exhausted or that large traders became antsy and covered shorts. Second, look how volume completely dried up after the bullish candlestick. The follow through after the rapid buying/short covering was non-existent and the reversal subsequently stalled out and rolled over.

Annotation 5, did not work out, and I believe the markets eventually went higher, breaking the trendline, but it was still a pivotal point based on the trendline and worth paying close attention to in considering a trade. Large traders were paying attention to the area, hence the increased volume when the trendline was touched. I would have been paying close attention to the time of sale to see who was winning in the trenches. Increased volume is vital in planning trades because the side that wins will have unimpeded reign until the next battle.

The way I see it, the smart money dukes it out at key support/resistance levels and bears or bulls will win. Let's say bearish sentiment prevails at resistance. From there, large bullish traders know that it is low probability to enter the market in the immediate future because they just attempted to do so and the bears prevailed. They retreat and sell out of their positions and the markets head lower on heavy volume. Volume soon dissipates but drifts lower as retail traders see that the markets are heading lower. Eventually, another position arises where the bulls think they might be able to withstand an assault and the large bull and bear traders fight it out at support/resistance again.



Quoting 
What I'm saying is that an increase in volume in and of itself doesn't mean much, except that there was greater participation, and only what happens next confirms whether it was truly accumulation or not.

Exaaaactly. That is why I was stating that the most advantageous time to watch the large prints on the Time of Sales is when these key areas are encountered. Let me use war as an analogy: When the enemy contemplates a retreat to give up on their current mission and retreat to salvaging a different strategic location, it will first show in the trenches before it is evident in the battle/war. . Tape reading is basically a way of getting the information from the trenches and confirming an idea of who is in control based on the rawest data available. Once again, I think a key reminder is to use the trenches to confirm what the war has told you thus far and not to create theories of how the war will turn out based on the trenches. Time of Sales should confirm hypotheses about volume/price action , not create them.


Quoting 
For example, all this morning as the high of the day was put in, volume kept dwindling, and looked to be WAY past exhaustion before the high of the day. A climax does not always precede a reversal--sometimes just falling volume does--the 11:10 1m bar looks very climactic, but it keeps going up. So, the context is important. After 95.00 broke, it really didn't matter how the volume looked--we were destined for the daily EMA, prior resistance, etc.: basically, 95.80 was about as clear a target as you can find. The 5m bar that was the high of the day closed in the middle, and had over 10K contracts, certainly looks exhaustive -- but it's the context that really gives it away though, as this was a super key level for oil.

I agree, sometimes volume doesn't precede a reversal but if volume does not confirm a reversal, then it is safe to say that the people bringing the markets down are small traders who are not worth following... not because they are unintelligient, but because they don't have the capital to direct the markets anywhere. Sure the market can drift down on low volume, but more often than not, that sh!t gets put to a stop by some large traders. Moves on small volume happen because no large trader finds value in entering/exiting the market at that price level. The minute large traders do enter, the move can accelerate or abruptly end. When you trade low volume breakdowns where volume doesn't accelerate on the downturn, you are at the mercy of large traders and your success relies on their decision to sit out the rally/decline or hope that the small traders saw value before the large traders and that the large traders will piggy back on a move started by retail traders. Unlikely imo.


Quoting 
Sorry for droning on, hope this addresses your post.

No apologizes necessary... the long posts you made in Tape is My Shape definitely enlightened me. Guys like you, Dionysus Toast and Fat Tails all have these logical arguments and ideas and are single handedly encouraging me to buy an elite membership just so I can read more ideas and theories that you all posts lol. Anyways, I am relatively new to Tape Reading but it appears the most ideal method for an analytical thinker like myself. Just some ideas that are bouncing off my head. Who knows what I will think tomorrow but this is what I believe today


Last edited by Bermudan Option; June 30th, 2011 at 03:04 AM.
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  #632 (permalink)
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Folks,I am Multicharts user, what are the indicator to install?

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  #633 (permalink)
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Bermudan Option View Post
Okay, just googled Wyckoff for the first time. It is nothing like I learned through Tape Reading and Market Tactics by Humphrey B. Neill. Wyckoff's method seems extremely complex and overly descriptive... like a science with rigidity and rules rather than an art

VSA (volume spread analysis) is an offshoot of Wyckoff, and in my opinion VSA is overly complex and has tons of confusing jargon. Wyckoff, in its pure form, is pretty simple to understand and the principles are logical. Granted, I'm no Wyckoff expert but I do appreciate the value of his approach.



Bermudan Option View Post
I agree, sometimes volume doesn't precede a reversal but if volume does not confirm a reversal, then it is safe to say that the people bringing the markets down are small traders who are not worth following... not because they are unintelligient, but because they don't have the capital to direct the markets anywhere. Sure the market can drift down on low volume, but more often than not, that sh!t gets put to a stop by some large traders.

I think you misunderstood my point--it was simply that a reversal does not have to occur on climactic, exhaustive volume. I just meant that at the top, you may find exhaustion in the form of heavy volume (absorption), or with very little volume (just no one more interested in buying). Either way, buyers are exhausted, but that can happen in different ways.

I would agree that a drift down on low volume in the midst of an up trend should not be considered a reversal, and that at some point some volume entering the picture would be a good thing if you are considering a reversal. However, I have noticed that the volume often does not enter at the very point of the reversal, sometimes it's not until a while after.


Bermudan Option View Post
Guys like you, Dionysus Toast and Fat Tails all have these logical arguments and ideas and are single handedly encouraging me to buy an elite membership just so I can read more ideas and theories that you all posts lol. Anyways, I am relatively new to Tape Reading but it appears the most ideal method for an analytical thinker like myself. Just some ideas that are bouncing off my head. Who knows what I will think tomorrow but this is what I believe today

Honestly I think you already have all the ideas you need to be a successful trader. I am fully convinced that in my brain are enough ideas, and that I am smart enough, to be a successful trader. Unfortunately I have much larger problems to solve in my path to success than intelligence, like managing trades, showing common sense, controlling fear and greed, and so on. You seem to be very intelligent and have good ideas. If you buy an elite membership, do it just to have access to 100% of the forum. I originally did it to have full access to indicators and historical data and the like, and while I don't really use many of those indicators, $50 is a small price to pay to try things, and have full access to the site.

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  #634 (permalink)
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josh View Post
An example of using volume in trading today. Took this trade, exited early unfortunately but clear target was upper channel line (.35 was initial target)...

Thank you for sharing Josh.

I use the same volume and CD setup and I am wondering if you could you tell me which bar you entered .01 at, and detailed with the volume and CD together what made you pull the trigger at that specific point?

Thanks,
Laurus

“If you wish to see the truth, then hold no opinions for or against anything.” - Hsin Hsin Ming
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  #635 (permalink)
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Michael.H View Post
Thats why i think most people fail. They treat everything with rigid rules, like if they see alot of trades at the bid, then someone is selling real hard, so you must go short. If a hammer forms, you need to take a long. If you get a green bar at a MA, you go long.

You will never make money doing that. You need to see what happens, and then react.

If you see huge orders being traded at the bid, and it stalls there for 5 min, and fails to go lower( meaning all it can muster is 1-2 ticks more to the downside), and starts trading back up, then thats bullish. Now if you see orders picking up at the ask a few ticks higher after this, then you have a reason to go long with a reasonably small stops. Its exactly what cunparis said, someone is absorbing the selling, or its a limit buyer. You don't know until the market tips its hand.

People treat their indicators like a buy and sell switch. Thats why you constantly hear people on these forums talking about how its impossible to make money.

I kind of wish i could show you guys a video ( I record all my live trades), but the files are huge, and my DOM is on there, with my account number.

If enough people are interested, i could try to do one using the ladder and record without my dom( with chart trader on) so you guys can see the trade. Ill put a separate dom up on sim so you can see the level II

You should do that, @Michael.H

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  #636 (permalink)
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Laurus12 View Post
Thank you for sharing Josh.

I use the same volume and CD setup and I am wondering if you could you tell me which bar you entered .01 at, and detailed with the volume and CD together what made you pull the trigger at that specific point?

Thanks,
Laurus

I saw the volume entering on that bar, and because I had the channel drawn, was ready for a long trade. The bar dipped below to the .92, and then came back up above .95. About 30-40 seconds into the bar close and I thought that if it broke 95.00, it was a good long, and on my tick chart it showed a small level there as expected, so I placed the buy stop above at .01. Buyers bought into the bar close and I was filled a few seconds before the bar closed. A probably better entry was to wait for the bar close and put the stop above the high for a long at .03. I did not use delta at all in the decision to go long. The previous solid up trend, channel line, and volume itself was all that was needed for me to take the trade.

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  #637 (permalink)
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josh View Post
Honestly I think you already have all the ideas you need to be a successful trader. I am fully convinced that in my brain are enough ideas, and that I am smart enough, to be a successful trader. Unfortunately I have much larger problems to solve in my path to success than intelligence, like managing trades, showing common sense, controlling fear and greed, and so on. You seem to be very intelligent and have good ideas. If you buy an elite membership, do it just to have access to 100% of the forum. I originally did it to have full access to indicators and historical data and the like, and while I don't really use many of those indicators, $50 is a small price to pay to try things, and have full access to the site.

Thanks for the advice. I'm looking forward to getting full access in the near future and discussing trading. Oh and timmyb is another poster I am looking forward to reading more about

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  #638 (permalink)
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josh View Post
I saw the volume entering on that bar, and because I had the channel drawn, was ready for a long trade. The bar dipped below to the .92, and then came back up above .95. About 30-40 seconds into the bar close and I thought that if it broke 95.00, it was a good long, and on my tick chart it showed a small level there as expected, so I placed the buy stop above at .01. Buyers bought into the bar close and I was filled a few seconds before the bar closed. A probably better entry was to wait for the bar close and put the stop above the high for a long at .03. I did not use delta at all in the decision to go long. The previous solid up trend, channel line, and volume itself was all that was needed for me to take the trade.

Thank you for the details. I understand what you say. I have looked over the chart again and see that CD shows both respect of support and divergence with price which coincides with the volume bar discussed. So all in all a good entry

By the way, thank you for sharing personal details further up. Have you read any of Van Tharp's books? I like his take on the matters. Not long time ago he released a new and expanded edition of the "Super Trader" book. I liked the first one and are most probably going for this one too to get the "expanded stuff".

Laurus

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  #639 (permalink)
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Laurus12 View Post
Thank you for the details. I understand what you say. I have looked over the chart again and see that CD shows both respect of support and divergence with price which coincides with the volume bar discussed. So all in all a good entry

By the way, thank you for sharing personal details further up. Have you read any of Van Tharp's books? I like his take on the matters. Not long time ago he released a new and expanded edition of the "Super Trader" book. I liked the first one and are most probably going for this one too to get the "expanded stuff".

Laurus

I see what you mean about the delta divergence now. If that helps someone place a trade, by all means go for it! But it's really not important for me, I just like to see per-bar delta because it's market information, though soon I hope to remove the dependency on it altogether.

I have "trade your way to financial freedom" but it has been 4 years since I read it, and with all the time I took off of trading, all I really remember is good advice on using a fixed %R per trade, adjusting position size to limit the risk to %R, and also determining the expectancy per trade using a R-multiple distribution. All in all I think it's probably a good read but I may find it a bit tedious if I were to read it now. It's more geared towards "systems" traders.

Today I had poor stop placement on 3 trades, each of which would have hit targets of about 50 ticks each, and I wound up negative on the day. I say this to say that the major improvements I need to make right now cannot (unfortunately) be easily found in a book. Though, I am reading "Trading in the Zone" by Douglas for the 3rd time and the first time in a few years and am finding a LOT of helpful things in there that I was not ready to see or understand the first two reads. But then translating that to real action is my challenge at the moment.

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  #640 (permalink)
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josh View Post
...Today I had poor stop placement on 3 trades, each of which would have hit targets of about 50 ticks each, and I wound up negative on the day. I say this to say that the major improvements I need to make right now cannot (unfortunately) be easily found in a book. Though, I am reading "Trading in the Zone" by Douglas for the 3rd time and the first time in a few years and am finding a LOT of helpful things in there that I was not ready to see or understand the first two reads. But then translating that to real action is my challenge at the moment.

With your efforts and what you wrote it sounds like you are on the right track. Regarding the first and last shared I guess most of us, at least at some point, can recognize what you are saying about our selves. Right now I am doing some heavy positive "brainwashing" by pinning sheets up on the wall with good and clear solutions to old bad habits. For my part, the thing that always surprises me is the kind of relief I feel when being able to have a genuine acknowledgement of my hangups. With a fresh breath it's like; finally I have the opportunity to get free But this is also one of the reasons for thinking that trading is very cool. The way I see it, it's a catalyst for growing up for real, a kind of forced high end Tao or Tai Chi practice.

I have known about Douglas' book for some time and just took another look over at Amazon. I think I am seriously going to get that one.

Laurus

“If you wish to see the truth, then hold no opinions for or against anything.” - Hsin Hsin Ming
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