Day Trading & Forex Forum

Reading one bar in the chart does not give you the complete picture, so further careful observation is necessary. Does the market top out and do prices start to fall back? If so, this could indicate that supply has swamped demand, capping the top of the market. But it might also only be the start of distribution. One high volume up bar on its own does not create a bear market but usually marks the start of supply. By reading the volume, it is possible to detect when the large operators have been active and whether their opinions have changed, probably turning bearish. If you cannot read volume, you are likely to think the market will keep rising and may buy on the reactions. The institutions, however, will be aware that the crowd is soaking up all it can and will artificially hold prices up until all has been unloaded. That point will be characterised by a low-volume up bar (signifying no demand), indicating to the large operators that the buying has dried up and the mark-down can begin. The opposite would be true if the operators have marked prices down far enough and can cover at a large profit – usually at a loss to the crowd, who are now panicked into selling in fear of even lower prices, usually on bad news. And so the cycle is repeated, over and over.

Professional operators move in and out of the markets at various times. The following two charts show trading on the S&P E-mini futures contract and each bar represents 30 minutes. The first chart shows high volume with professional activity, which is highlighted. The second chart shows no activity. This is as important as professional activity because markets work both on supply and demand and on no supply and no demand.

Professional Activity (click to enlarge)

Non-Professional Activity (click to enlarge)

By reading the volume with price, you can learn to trade successfully in any time frame as you will begin to know enough to distinguish the real movements from the false ones. There are a lot of false drives in the market which are deliberately done to trick you into losing money. This is how the professional operators stay in business. But by understanding the different intensities that appear in the market, you can make money too. All you have to do is follow the big operators: when they move, you move too. So, you may ask, all I have to do is sit back and wait for the operator to tell me when?

Unfortunately it’s not that simple. Because volume is the powerhouse of the market, we have to observe the corresponding price action: is there an old trading area to the left on the chart, say an old high or an old low? If you see low-volume down bars with a narrow spread, then this would indicate that the professional operators were bullish and that they would be willing to absorb the supply as they reached the old top. However, if you see low-volume on up bars as the market approaches the old top, then this would indicate that the market was weak and it would be fairly safe to short near this level.

This would also be true for trend lines. Trend lines are the railroad for prices when the market is trending strongly and we would be looking for support or resistance as these trend lines are approached. For example: if you see a wide spread on increased volume as it approaches an old trend line (or old top or bottom), you can expect this to be broken. But if you see no demand (weakness) or a test (strength), it will not be broken: you can place your orders and make a profit as you can read the path of least resistance.

Imagine the path of least resistance to be water running down a hill. It would not just run down in a straight line, it would twist and turn if obstacles were in its way – so the path of least resistance would be the easiest path, not necessary the quickest one. This is how the operators mark prices round to find volume. If there are large orders at a certain price, the operator might avoid that price level as it would mean he would have to absorb this supply at higher levels – a quick way to go broke. This is why we have shakeouts and whip-sawing in the early stages of a rally, because it is not cost-effective to absorb ever-increasing supply at higher levels. Volume holds the key to the truth.

(This article is reproduced with the kind permission of Shares Magazine).