Interpretation of volume

Dear all, I would welcome any thoughts/debate regarding volume within the following context.

My understanding of volume is that increasing volumes during an uptrend is bullish whilst falling volumes put rallies into question. Likewise for a declining price but the volume isn’t as important as prices will also fall under their own weight. The way that I tend to use volume is in conjunction with candlesticks and candle patterns – giving more weight to a pattern if it is accompanied by a higher than average volume.
Is it that simple or is there much more to it?

For example I’ve started looking at volume spread analysis/VSA. One of the VSA lessons is that not all volume is equal. For example volume combined with price movement & high/low spread can point towards accumulation / distribution. I have to say that I am a little sceptical as just because there is no evidence of smart money supporting a move at a given point, that doesn’t mean a) it isn’t there or b) it won’t be there tomorrow/next week. That said I think there are times when the price moves lower on high volume and then instead of going even lower in the next session, it goes higher which could point towards accumulation/support by professional-money. But then that still depends on the context of the move as it may be retail buyers buying because they perceive the price to be good value as it is lower than it was a week/month or year ago.

I guess part of this depends on how and at what time volume plays a part in the decision making process. I currently look at price movements and patterns first and then look at volume for confirmation or vice versa. The trouble is I suspect that volume should be part of the price pattern /trend analysis rather than identifying patterns and then using volume to confirm or not.

Am I reading too deeply into this? Or is it simply the case that sometimes volume is a helpful indicator and sometimes it isn’t and that it depends on the context e.g. if it looks like the top of a rally, volume is a critical indicator where as if it’s range-bound you shouldn’t pay too much attention to it?

The other part that I struggle with is interpreting the overall volume trend – the volume bars can look quite similar over long periods. Does anybody else use moving averages for volume, on balance volume, money flow index, price on volume indicators?

When looking at volume spread analysis it is important to remember that there are 4 factors to consider; volume, price range, close, AND the surrounding bars. VSA applied to a single bar is not valid and dangerous as you have mentioned because the "smart money" is certainly still out there waiting for the herd to follow their mis-direction, assuming you buy the whole smart money conspiracy thing.

In my years of trading all sorts of markets there's only one thing that's consistently worked for me.

That's to trade price action only, wait for confirmation of a move, and despite all the guru's, don't get greedy trying to "let your profits run"... too many times they will run away from you forever.

I set stops and targets based on a near term average range of prices for the time period I trade (i.e. 9 - 12 EST) and on a time frame one or two higher than the time frame being traded (i.e. ATR on the 4 hour if I'm trading the 30 min chart). My position size is based on the stop setting.

I'm experimenting with "range bars" as an alternative to regular time price bars. They appear to smooth out considerable noise and in effect give you signals like the old point and figure charts but you can apply conventional TA to them.

Dave

hello Dave Brawner,

you have made 2 posts in the past 14 mins or so that I though were both very good. It says that you joined in February 2006... 5 years is a long time to wait for your fi rst go

anyway what was it u made 2 posts i like so please make more

Dash Riprock

DashRiprock said:

hello Dave Brawner,

you have made 2 posts in the past 14 mins or so that I though were both very good. It says that you joined in February 2006... 5 years is a long time to wait for your fi rst go

anyway what was it u made 2 posts i like so please make more

Dash Riprock

Click to expand...

http://www.trade2win.com/boards/images/smilies/icon_cheesygrin.gif

Thanks Dash... Yes it's been some time since I joined and I've been trading and traveling extensively ever since. As I hope my life is settling down a bit, I'll likely visit the forum more often and if the mood strikes, I'll post a few more replies.

Sometimes I just can't help myself when I read something that perpetuates the herd mentality. But, what the hey, we need the herd so we can make money as traders right?

Dave

well i hope you had a nice time on your holidays.

u said about range bars, well i dont use them but i do sometimes use volume bars and renko bars so you can look at them if u r bored too

orangetrader said:

Dear all, I would welcome any thoughts/debate regarding volume within the following context.

My understanding of volume is that increasing volumes during an uptrend is bullish whilst falling volumes put rallies into question. Likewise for a declining price but the volume isn’t as important as prices will also fall under their own weight. The way that I tend to use volume is in conjunction with candlesticks and candle patterns – giving more weight to a pattern if it is accompanied by a higher than average volume.
Is it that simple or is there much more to it?

For example I’ve started looking at volume spread analysis/VSA. One of the VSA lessons is that not all volume is equal. For example volume combined with price movement & high/low spread can point towards accumulation / distribution. I have to say that I am a little sceptical as just because there is no evidence of smart money supporting a move at a given point, that doesn’t mean a) it isn’t there or b) it won’t be there tomorrow/next week. That said I think there are times when the price moves lower on high volume and then instead of going even lower in the next session, it goes higher which could point towards accumulation/support by professional-money. But then that still depends on the context of the move as it may be retail buyers buying because they perceive the price to be good value as it is lower than it was a week/month or year ago.

I guess part of this depends on how and at what time volume plays a part in the decision making process. I currently look at price movements and patterns first and then look at volume for confirmation or vice versa. The trouble is I suspect that volume should be part of the price pattern /trend analysis rather than identifying patterns and then using volume to confirm or not.

Am I reading too deeply into this? Or is it simply the case that sometimes volume is a helpful indicator and sometimes it isn’t and that it depends on the context e.g. if it looks like the top of a rally, volume is a critical indicator where as if it’s range-bound you shouldn’t pay too much attention to it?

The other part that I struggle with is interpreting the overall volume trend – the volume bars can look quite similar over long periods. Does anybody else use moving averages for volume, on balance volume, money flow index, price on volume indicators?

Click to expand...

I am learning to trade from the order book and time and sales. In my observations so far a start of a move can be low volume and then as volume is added the move gathers momentum, if you can spot the move starting you have a good chance of making some cash. If the market is flat and then people start hitting into the bid and the price is going to offer on low volume this is an indication that a down move could be starting. If several prices are taken out on low volume and then size comes into the move this is where the market can move fast. So I am looking to get in as the move is starting always ready to bail if move breaks down.

If you are using TT you can configure the DOM to show volume at each level either numerical or a bar chart, this can be useful. I would be interested to know if other traders are using volume successfully.

dbrawner said:

When looking at volume spread analysis it is important to remember that there are 4 factors to consider; volume, price range, close, AND the surrounding bars. VSA applied to a single bar is not valid and dangerous as you have mentioned because the "smart money" is certainly still out there waiting for the herd to follow their mis-direction, assuming you buy the whole smart money conspiracy thing.

In my years of trading all sorts of markets there's only one thing that's consistently worked for me.

That's to trade price action only, wait for confirmation of a move, and despite all the guru's, don't get greedy trying to "let your profits run"... too many times they will run away from you forever.

I set stops and targets based on a near term average range of prices for the time period I trade (i.e. 9 - 12 EST) and on a time frame one or two higher than the time frame being traded (i.e. ATR on the 4 hour if I'm trading the 30 min chart). My position size is based on the stop setting.

I'm experimenting with "range bars" as an alternative to regular time price bars. They appear to smooth out considerable noise and in effect give you signals like the old point and figure charts but you can apply conventional TA to them.

Dave

Click to expand...

DBA thanks for your reply, I had given up any hope of hearing from anybody on this. I am relatively new to this game, I have been trading full-time for just under a year (after spending a good few years doing the odd position trade). Over the past 12mths I have been trying to learn the "let your profits run" lesson but have reached the same conclusion as yourself. My experience is telling me that markets / contracts tend to give a certain amount based on whether they are moving sideways or trending. Once they offer it, you may as well take it rather than question whether there's more to come as the probability of that happening is aginst you.

orangetrader said:

DBA thanks for your reply, I had given up any hope of hearing from anybody on this. I am relatively new to this game, I have been trading full-time for just under a year (after spending a good few years doing the odd position trade). Over the past 12mths I have been trying to learn the "let your profits run" lesson but have reached the same conclusion as yourself. My experience is telling me that markets / contracts tend to give a certain amount based on whether they are moving sideways or trending. Once they offer it, you may as well take it rather than question whether there's more to come as the probability of that happening is aginst you.

Click to expand...

Orange,

Keep learning, it's the only path to lasting success. I've mentioned in other posts that I set my targets (both profit and risk) based on the near term market range (ATR 5 or 7 usually). I also only look at bars within my trading period (mostly 9 -12 EST). I find that any other bars are just background noise and can adversely affect the range calculation for my trading periods. I use a time frame greater than my trading time frame (i.e. ATR for 4hour when trading 30 min charts). This gives me an idea of how far away I can set realistic targets and I draw lines on my 30 minute chart. Finally, I use a percentage of the ATR to establish my stop and TP orders (my theory is that in order to move the full range it has to first move 50% or even 25%).

Now this results in small profit targets so position size is where the money gets made. However, position size must be calculated based on your allowable risk.

So this is the slow boat up the river, but I've found through years of ups and downs, that slow and consistent beats the wild hare nearly every time. Hmmm, that might make a great child's fable... :idea:

OBTW, it took a little under a year of trading (average 3 days per week) to build a small account to where an average day's trading is a respectable income.

Keep trusting your experience...

Dave

Okay so here are my two cents on interpretation of volume...

We've always been told that there is no price without volume. In other words, a trade (transaction) must occur in order for us to say "the current price of one contract is x". But what we are really saying is "the last agreed upon transaction was at price x", and that does not necessarily mean that you can convert all your stocks/commodities to cash at that price or vice versa. Which is where time as a dimension comes in, the longer ago a transaction occured at a specific price, the less confident we are that it will occur at that same price again. (An example would be asking "what is the value of my property NOW" and without having someone make a bid, you can look around for properties with similiar characteristics as yours, theoretically find a property with perfectly matching property, find out what the seller and buyer agreed was fair value, and you can say that that is the value of your property. If this transaction occured one minute ago you are far more confident with this conclusion than if it occurred one year ago)

So they keep saying that a transaction represents an AGREEMENT between a buyer and a seller. The more the number of transactions the more agreements, the more the volume, the more commitment. Here's my problem: supply/demand concept and auction theory in the process of price discovery of financial instruments just isn't the same as it is with what we're used to in everyday life. When the fruit stand guy and you agree on the price of a fruit, it means you both believe the price is right (ie fair), or else he wouldn't have agreed to sell and you wouldn't have agreed to buy. As a perishable commodity, the fruit you bought will probably be eaten/juiced/converted to some other form but the bottom line is that your intention is to use, and the seller's intention is to get it off his shelf (whether at a profit or just to recover part of intial purchase price). Okay, example taken too far, so I'll cut to the chase:

Transactions in the financial markets represent DISAGREEMENTS over price and not agreements.

Lets use futures as an example since they are a zero sum game:

Seller believes "that's as high as we're going"
Buyer believes "that's as low as we're going"

Both conclusions are at the same price.

Every trade (agreement to transact) involves two parties disagreeing on whether the price is expensive or cheap.

Which is why reversals tend to happen on major volume bars, more and more agreements to disagree, and the scale tips.

Bonus question: There are only so many possibilities for disagreement scenarios in a transaction between theoretical party A and party B, can you list them?

Hello you raise an interesting point.
The way that I read the motives behind volume are a combination of passive & active i.e.
*Buyer & seller agreement on a price (buyer long & seller short – they have different views but agree that the price is right)
*Buyer & seller disagreement on price (buyer covers a short & seller closes a long position)
*Buyer disagreement & seller agreement on price (buyer closes a long & seller enters a new short position)
*Buyer agreement & seller disagreement (buyer enters into a long position & seller covers a short position)
I guess you also need to factor in possible distortions such as programme trades and other reasons for entering the trades aside from price e.g. mask aggressive buying, intervention to support a falling stock market, etc….
It seems to me that the accumulation principle is essentially active buyer agreement in higher volumes and distribution is active seller agreement in higher volumes. However in reality there is a combination of active and passive buying and selling and therefore the motives aren’t that important just the bare facts/volume and your intuition.

I'm tempted to weigh in here with my two cents worth... (Sorry it's so lengthy)

I have to say first that the basic assumption of volume and price was backwards as there can be no volume traded until there is a transaction and thus a price agreement, which of course establishes the price (at that time and transaction).

Second, if prices were established as a result of "disagreements" then the core premise of a transaction could never exist. Disagreements of opinion provide the emotional fuel to drive price direction and potentially trends, but they cannot by definition establish a transaction which is an agreement by two parties to trade something at a stated (agreed upon) value.

Finally, as you mentioned, the financial markets are not like the day to day consumer markets. There is no direct interface between the buyer and seller. In most cases a middleman (the market makers, floor specialists, or even your broker, etc.) hold positions against which they "match" buyers and sellers. But the "match" is still an agreement from a buyer to buy and a seller to sell at the stated (order) price, or better depending on the order type).

If there are net more buyers the prices will rise until there are no more buyers to bid, no more supply to sell to them, or sellers refuse to offer for whatever their reasons. This is the definition of a top or resistance.

If there are net more sellers, the prices will fall until there is no more supply to sell, sellers refuse to sell (offer), or buyers refuse to buy (bid). This obviously defines the bottom or support.

So... by the very mechanics of the above, "disagreements" create support and resistance points where sellers refuse to offer and/or buyers refuse to bid.

Now for the actual argument, you stated...

"Lets use futures as an example since they are a zero sum game:

Seller believes "that's as high as we're going"
Buyer believes "that's as low as we're going"

Both conclusions are at the same price. "

You have a wee small problem with your assumptions.

Futures (or any other financial market) are NOT zero sum games. There are fees (and taxes) which eliminate the true "zero sum" nature of the transactions. For every seller there is a buyer, yes, but not every loser has a single corresponding winner.

In fact, because of fees, it is very common for a "winner" to be a loser after deducting commissions and fees. The only sure "winners" in any given transaction are the receivers of the fees and commissions. (by way of example, a seller might be unloading a loser and the buyer might wind up an optimistic loser if the price continues to fall. They both lost and the broker profited on both sides.)

Next, sellers believing "that's as high as we're going" is hardly the reason they will stop offering. They will generally only stop offering when they have sold all they need to sell (or can sell) especially in a rising market. This is the most desired distribution pattern for a speculative trader, rising prices. They will continue offer (unload) until no one bids or they have closed out their position. They won't stop because they "think" the top has been reached. They'll wait for the market (bidders) to tell them the top has been reached.

Likewise, buyers believing "that's as low as we're going" is also pure nonsense. Buyers will buy all the way down to zero depending on their own reasons. Consumers (industrial or commercial users of a commodity) might be hedging positions and future costs for raw materials, speculators will be looking for "deals", etc., etc. Buyers are more likely to stop bidding when prices rise above some relative value (the top) than pull back because prices are too low (the bottom).

And finally, "both prices are the same" is not the operational model in the financial and commodity markets where a middle man is matching the bids and offers of many hundreds if not thousands of players above and below the current (or last) transaction price. It's not a free forum were you call out your offer or bid and someone in the room responds with a counter bid/offer until you both agree, one on one.

Take a look at any Level II trading platform to see the open orders above and below the current price. These orders represent opinions that can agree or disagree with the opinions on either side of the trade depending on their purpose and intent. Remember, a consumer or hedger will be on the same or opposite sides of a transaction as a speculator for entirely different reasons.

As these "orders" get matched, a transaction occurs and the number of shares, lots, etc. is added to the days volume. If there are no matching orders, there are no transactions and thus no volume traded.

All in all, I'm glad to see people exploring possibilities and thinking outside the box of traditional explanations. Just be careful about the foundational assumptions of your new theories.

Dave