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

  #641 (permalink)
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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

It's a good book. "The Disciplined Trader" is also good, but drones on a little about brain stuff. "Trading In The Zone" is a better book IMO and just a fantastic read--Douglas really knows his stuff and has a great insight into human psychology.

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  #642 (permalink)
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Hi everyone, new to the site but have been using VSA for a couple of years. I have been mainly posting over at FF for the past 6 months but getting a little tired of the naysayers. I look forward to joining in with the discussions here.

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  #643 (permalink)
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josh View Post
It's a good book. "The Disciplined Trader" is also good, but drones on a little about brain stuff. "Trading In The Zone" is a better book IMO and just a fantastic read--Douglas really knows his stuff and has a great insight into human psychology.


I have read both of these books and learned a great deal. The big down side is that they are poorly edited.

The editor(s) of these books should be strung up and shot!!! You have to read and reread each section to understand what is being shared.

I actually found a 72 word sentence in The Disciplined Trader

I ended up making my own "cliff notes" version of what appealed to me.

RJay

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  #644 (permalink)
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I did not take this trade, and I can't say I definitely would have as we never know these things, but I was typing something and did not see the chart when this happened, and am about 90% sure I would have jumped all over this.

The big news candle (10:01) precedes a period of consolidation, with progressively lower volume. All of a sudden at 10:17 things pick up. The next bar dips just below 94.00, and closes above. An aggressive entry is long at .11 or so, but the real confirmation is long at .20, which is 1 tick above the prior 5m bar high. Just look at that consistent volume push on the first 3 candles there, effectively signaling a rejection of 94 and it did go up to retest the channel line at .70 (not extended in the attached chart but you can see). In fact, it went to test a globex high near 95. Further confirmation was the EMA support on both 5m and 1m charts.

Also, I did not mark it on the chart, but notice around 9:48 at the low tick of the day, where there was nice volume, just over 1K for that minute. In the following several bars sellers could not even tick price below .50--that held nicely, and I longed a break above the previous high of the consolidation at .75 -- I was stopped out by 2 ticks because of a terribly placed stop (it was at .66 I think), and this was just before ISM at 10:00 which rocketed price unusually high all the way back up past the previous breakdown point (I think a large number of shorts bailed, making this a significantly big move). So in this example, it was the volume on this 9:48 bar which gave me confidence to long at .75, that and the fact that this was a break of the 1m EMA as well.

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How to use volume in your trading-clvol.png  
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  #645 (permalink)
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Exhaustive volume in context

Here is a trade I took this morning. Due to bad stop management I was out early for +4, but the target was +57 from my entry, and had my stop been simply at BE+1 I would have been home free for a nice move down. Couldawouldashoulda, but my post here is about the setup.

The context is the key--I shorted 95.87, because 95.85 has been, and continues to be, an incredibly important level right now for oil. Without this context, the volume analysis really means squat.

The thing is, the whole move up was fast, furious, and totally without substance. Objectively it's hard to say what that means, but basically, a retest of 95.85 was almost necessary, as we opened Sunday and have not really even tested last week's close of 96.20, as we dipped way down during Globex. In other words, this move up felt almost obligatory. It lacked the conviction to move higher.

I did take a long around .62, and the target was .87, and I put it as a reverse-on-target trade so I would immediately get short. Once we broke 95.20 on good volume (it was a key level overnight), there was really nothing stopping the train to 95.85. The first obvious thing is this: the 5m bar (see chart) has a 100 tick range. On this kind of move, it's almost unthinkable that we would continue higher without a significant retrace (particularly since we never retested 95.20 after breaking through it). Could it happen? Of course, but the probabilities are very high that it would bounce. High enough, with quantified risk (stop above the bar high at .96, with only 9 ticks of risk) enough to take the trade with no confirmation.

The real kicker though was the 1m volume at 9:55 -- 3700 contracts traded in 1 minute is, in anything but a panic selloff, unsustainable. That's classic volume exhaustion. 9K contracts on the 5m also almost never happens outside of scheduled news reports, panic selling, and exhaustion. Over the next couple of minutes, there were no signs of buying strength (which is one reason why I moved my stop too low, too early).

After we moved down below 95.20 the real selling came in. I took an ill-advised long somewhere in that vicinity, only to get plowed over. The mission here for the market seemed to be to test the globex low of 94.31, which happens to coincide with last week's low of 94.34. It did this, and on this bar (10:56am) the volume was 2200 contracts. Anything over 2K is a big red flag for me, so I started looking for a reversal trade. It was confirmed at 11:01 after we pushed down on quite weak volume (compare: 783 contracts on a break of the low). I bought at 94.20, and placed my stop at 94.15, close as this was counter-trend, and was taken out 1 tick above the low of the day of 94.14 ... bad stop placement on both trades. But, both great entries, and improving my trade management and exits continue to be my top priority.

A great second-chance and more confirmed long would be a break above the high of the doji-like 5m bar at the low (see chart). Compare that volume (no one interested in participating there) with the prior bar's volume.

Also note 11:47 -- 2700 contracts ... close near the middle ... a good time to exit longs if you have one.

Several examples of how volume can gives clues that price alone does not. But, it's got to be used in context, not just "this bar's volume is higher so we must be going up", else it will give just as many false signals as any indicator.

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How to use volume in your trading-clexhaustion.png   How to use volume in your trading-cl5m.png   How to use volume in your trading-1mb.png  
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  #646 (permalink)
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Exhaustion and Flush Volume

Hello Everyone,
I wander to know if someone can explain Exhaustion and Flush Volume, terms that Barry (Emini-Watch) use in his trading and indicators...I use MT4 and except Better Volume I don't have any of his indicators but I am watching his videos and trying to copy his analysis...Therefore I have to be able by looking charts by naked eye to recognize those volumes...I have some success with stopping volume and profit taking, No Demand/No Supply... He described Stopping volume, Profit Taking volume and is easy to follow...But for those two that I am asking for I couldn’t find description yet...So if someone knows and is willing to share I thank very much.


For example The profit taking pattern is described as:
  • A new high
  • Volume greater than yesterday's volume
  • Range less than yesterday's range
  • Close off the highs
Can Enyone describe Exhaustion and Flush Volume on same way?


Last edited by mjackson; September 9th, 2011 at 02:07 AM.
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  #647 (permalink)
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HVC and LV

Hi and thanks for the information you posted on this subject. Is your volume patterns a similar indicator to
Better Pro Am ? I like your idea I'm just unsure how to tell the difference when a HVC bar appears if this is a turning point or a continuation in the same direction..for example in the image you posted below the first HVC
bars follow turning points however the last ones preceed a run up...
Appreaciating your feedback.



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  #648 (permalink)
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sagi View Post
Hi and thanks for the information you posted on this subject. Is your volume patterns a similar indicator to
Better Pro Am ? I like your idea I'm just unsure how to tell the difference when a HVC bar appears if this is a turning point or a continuation in the same direction..for example in the image you posted below the first HVC
bars follow turning points however the last ones preceed a run up...
Appreaciating your feedback.

If only it were so simple, that high volume meant either a reversal or continuation--then trading wouldn't be a challenge would it?

I encourage you to not think of a high or low volume bar by itself as a "signal" -- volume means one and only one thing in and of itself: amount of participation. That's it, nothing more. If you look at my post, two posts above, you'll see that I mention that IMO context is really the key to interpreting volume. If you see volume enter the market at a particular place of significance, then that volume can be analysed with an objective, rather than just seeing high volume and thinking reversal, or continuation.

The market can trend a long time on low volume, it can reverse on low volume, it can reverse on high volume--it can do pretty much anything. So there must be some "background" context you're considering to put the volume you see in a context to make a trading decision. This is the hard part--this is actually learning to trade. In your chart, for example, it says "LV bars show the move isn't likely to continue." Fading a low volume move like this blindly will get you killed. As you can see from what happened later, this simply meant that there was not enough participation at THAT point to continue the move. Buyers had to be located a few handles lower, where the double base occurred. I can't see what's left of this, but price was bullish--and price is the determinant of supply or demand: if prices goes up, there was more demand than supply, and vice versa. Volume has nothing to do with supply and demand. Only price can tell you that. If this doesn't make sense I'll try to clarify it.

The problem with focusing too much on a volume "signal" is that in order for a reversal to happen, you actually need the other side to get active. Buying exhaustion, followed by low participation in the continuation up, for example, will often encourage the other side to become active, but not necessarily. You need to sell when the other sellers are going to sell to have a profitable trade, not just when buyers have slowed down. In fact, I made this mistake today by fading a move up that I should have simply been long with. Particularly when there is a strong trend in place, what appears to be buying exhaustion and a reversal is in fact simply buyers taking a break, allowing sellers to provide the liquidity necessary for a continuation. Sellers will jump in, convinced that it's a reversal, and then buyers wait for a lower price to really turn it on again, and then the sellers execute their stops when they bail, and the move continues.

In the chart you posted, buyers push price up after two dips to the same area, near where buyers had previously bought. This is a higher low than before, and the move up is bullish. After sideways consolidation, it only helps that there was high volume in the consolidation, because whoever is on the wrong side will bail. Given that we have a bullish context, the higher probability direction is up. Could it have been down? Yes, absolutely. There is no rule, however, it's been my experience that this type of movement up followed by a consolidation tends to favor a continuation. In fact, often the bulls will yield to the sellers first to trap a few more short on a fake move down, and then will buy strongly to continue.

Using the tick chart for volume analysis is probably ok for ES as it seems you're trading. However, consider using a time-based interval, as your tick chart is already based on activity, and it can be beneficial to compare volume participation over a period of time, rather than volume participation over a period of bars which are already based on activity. I would turn off the indicator which colors the bars and simply use your eyes. This will take your mind off of being "signal" oriented and let you actually watch what's happening. Just watch the volume as it increases. What is the context, who is buying and selling, and what is it likely to indicate? There is no shortcut I'm afraid, and I still have a long way to go too. Just put in the time watching, and while you're at it I would read some Wyckoff, and throw in a little VSA perhaps too, just don't get carried away with VSA as it's too bloated and complex.


Last edited by josh; September 9th, 2011 at 05:17 PM.
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  #649 (permalink)
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josh View Post
If only it were so simple, that high volume meant either a reversal or continuation--then trading wouldn't be a challenge would it?

I encourage you to not think of a high or low volume bar by itself as a "signal" -- volume means one and only one thing in and of itself: amount of participation. That's it, nothing more. If you look at my post, two posts above, you'll see that I mention that IMO context is really the key to interpreting volume. If you see volume enter the market at a particular place of significance, then that volume can be analysed with an objective, rather than just seeing high volume and thinking reversal, or continuation.

The market can trend a long time on low volume, it can reverse on low volume, it can reverse on high volume--it can do pretty much anything. So there must be some "background" context you're considering to put the volume you see in a context to make a trading decision. This is the hard part--this is actually learning to trade. In your chart, for example, it says "LV bars show the move isn't likely to continue." Fading a low volume move like this blindly will get you killed. As you can see from what happened later, this simply meant that there was not enough participation at THAT point to continue the move. Buyers had to be located a few handles lower, where the double base occurred. I can't see what's left of this, but price was bullish--and price is the determinant of supply or demand: if prices goes up, there was more demand than supply, and vice versa. Volume has nothing to do with supply and demand. Only price can tell you that. If this doesn't make sense I'll try to clarify it.

The problem with focusing too much on a volume "signal" is that in order for a reversal to happen, you actually need the other side to get active. Buying exhaustion, followed by low participation in the continuation up, for example, will often encourage the other side to become active, but not necessarily. You need to sell when the other sellers are going to sell to have a profitable trade, not just when buyers have slowed down. In fact, I made this mistake today by fading a move up that I should have simply been long with. Particularly when there is a strong trend in place, what appears to be buying exhaustion and a reversal is in fact simply buyers taking a break, allowing sellers to provide the liquidity necessary for a continuation. Sellers will jump in, convinced that it's a reversal, and then buyers wait for a lower price to really turn it on again, and then the sellers execute their stops when they bail, and the move continues.

In the chart you posted, buyers push price up after two dips to the same area, near where buyers had previously bought. This is a higher low than before, and the move up is bullish. After sideways consolidation, it only helps that there was high volume in the consolidation, because whoever is on the wrong side will bail. Given that we have a bullish context, the higher probability direction is up. Could it have been down? Yes, absolutely. There is no rule, however, it's been my experience that this type of movement up followed by a consolidation tends to favor a continuation. In fact, often the bulls will yield to the sellers first to trap a few more short on a fake move down, and then will buy strongly to continue.

Using the tick chart for volume analysis is probably ok for ES as it seems you're trading. However, consider using a time-based interval, as your tick chart is already based on activity, and it can be beneficial to compare volume participation over a period of time, rather than volume participation over a period of bars which are already based on activity. I would turn off the indicator which colors the bars and simply use your eyes. This will take your mind off of being "signal" oriented and let you actually watch what's happening. Just watch the volume as it increases. What is the context, who is buying and selling, and what is it likely to indicate? There is no shortcut I'm afraid, and I still have a long way to go too. Just put in the time watching, and while you're at it I would read some Wyckoff, and throw in a little VSA perhaps too, just don't get carried away with VSA as it's too bloated and complex.


Beautiful post, and hard earned.

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  #650 (permalink)
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Beautiful post, and hard earned.

Thanks Gary, I really appreciate that, coming from a great trader such as you. Hopefully one day I will be as in tune with the markets as you are!

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