Article Volume Analysis

T2W Bot

Staff member
1,490 109
Understanding the way volume affects the market is key to successful trading, as price signals won’t always tell the whole story. Professional traders have one advantage over the private trader: they can read volume. Not only that but they can – and will – hide volume from you to give themselves an advantage. Large banks and brokerage houses claim that to make a market, they need an edge over the rest of the crowd. Large orders that are processed do not appear on the tape, as they would show up on the radar of other professional traders who would then change their bid/offers or pull orders. 
The professional trader uses price and volume, and usually no other indicator, to read the true balance of supply and demand, as Richard Wyckoff preached at the turn of the century. The study of price and volume and their relationship is vital to detect turning points in the market, as professional operators have large amounts of capital and need to work this capital to make money. This cannot...

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frugi

1
1,827 126
In this article Sebastian Manby discusses his take on classic Wyckoff principles regarding the study of price and volume patterns.
 

jmreeve

Well-known member
432 13
Trouble is Wyckoff wrote these principles a long long time ago before markets were linked together with derivs, stat arb programs and heavily influenced by algorithmic trading. The price volume picture is not as simple as it used to be.
 

dbphoenix

Legendary member
6,953 1,256
You're correct that it's not as simple as it used to be, but though the character of "volume" has changed, the principles haven't. They're derived from behavior, and that never changes (or hasn't, so far).

The most common error that people make here is the same error they make when "interpreting" candles: focusing on each bar or bar-pair or cluster as a discrete event. Whatever happens is part of what happened before and will affect what happens next. Therefore, focusing on the "waves" of buying pressure and selling pressure is far more productive than worrying about what this or that particular bar or bar-pair means. The market is a movie, not a slide-show.
 

Rhody Trader

Senior member
2,620 266
dbphoenix said:
The market is a movie, not a slide-show.

I can honestly say that's one of the best quotes I've ever read or heard. Well said!
 

dbphoenix

Legendary member
6,953 1,256
While beginners have pretty much the same problems year after year, there are also trends in problems. A current and persistent trend has to do with the widespread availability and use of charts, particularly during the last ten years. Two of the most damaging characterisitics of this trend are the tendency to view price movement as click click click and to read the chart from right to left, focusing on what's called the "hard right edge" and on predicting what's going to happen next. I'm far more interested in what happened prior to the "hard left edge" so I can get some idea of where traders are most likely to look for and find trades.

Wyckoff was very big on anticipating and planning but not so much on predicting. There have been endless discussions/debates/arguments about the difference and I don't want to deflect the thread. But an appreciation of the nature of the trader's task is helpful. Otherwise, he can find himself perpetually at the mercy of others.
 

remnent

Newbie
1 0
This article gives us a view of what professional activity looks like on a chart, I'm not sure how to use it in a trading methodology alone, I'm sure there's more to the story!
 

jmreeve

Well-known member
432 13
remnent said:
This article gives us a view of what professional activity looks like on a chart, I'm not sure how to use it in a trading methodology alone, I'm sure there's more to the story!

The chart is almost entirely the result of professional activity in most markets.
Private investors/traders count for a small part of the total volume and in practice
have very little impact on the market even in aggregate. The idea that volume
is anything like equally split between professional and non professional market
participants is just a fantasy.
 

newstart

Junior member
40 4
This article came just at the right time for me as I was looking for the answer to a few questions which it does perfectly
 

Skog

Member
74 8
newstart said:
This article came just at the right time for me as I was looking for the answer to a few questions which it does perfectly

Sebastian has also posted a few charts around here on the boards under the name VSATrader. Just use the search thingy to find his posts.

Here is also a website that might be of interest:

http://www.vsatrader.com/
 

Artful

Junior member
22 0
It is true, and it would appear that the only way to gauge market activity is to examine the Volume in relationship to the spread of the bar (High to Low). There is very little written about this concept. There are some markets that don't even supply the volume data.
 

dbphoenix

Legendary member
6,953 1,256
Actually, the volume need not have anything to do with the range. The volume reflects the amount of trading activity, the effort. The bar or candle or whatever reflects the result of that effort. The position of the close in relation to the O, H and L are at least as important as the range.
 

JumpOff

1
702 14
jmreeve said:
The chart is almost entirely the result of professional activity in most markets.
Private investors/traders count for a small part of the total volume and in practice
have very little impact on the market even in aggregate. The idea that volume
is anything like equally split between professional and non professional market
participants is just a fantasy.

Do you mean "all charts are almost entirely the result of professional......." or this specific example.

This article used the e-mini S&P as an example, and I am curious about that. I thought that professionals (fund managers who are required to keep large amounts of capital in an open position) rarely trade "mini" anything because of the higher transaction costs.

Trouble is Wyckoff wrote these principles a long long time ago before markets were linked together with derivs, stat arb programs and heavily influenced by algorithmic trading. The price volume picture is not as simple as it used to be.
Are the pros trading the regular S&P and the arb programs keep the e-mini S&P from getting out of whack with the S&P? Or has the e-mini tail started to wag the S&P dog as the result of higher volume and better liquidity on the e-mini?

Actually, I'm not sure how to compare the two. The S&P had a mean of 50,000 contracts traded through April, while the mini had a mean of about 750,000 contracts during the same time, - but the e-mini is only worth 1/5 of the full S&P contract. So the emini has a volume equal to 150,000 S&P contracts... that's 3 times the amount of the S&P full size instrument.

Well all that is a prelude to my real question. Isn't it true that because of the way the markets are linked, and the way that computer arbing programs work, that the most important thing to know about trading is: which instruments (if any) are "the dogs." If you are trading one of the wagged tail derivatives, you would need to watch volume and price on the dog, no?

I've asked something like this before, and feel the familiar overheating of my logic circuit breakers.... I think I'll trot off to a cool muddy spot and rest now.....

JO
edit: actually - I don't think those contract numbers are right , although the ratio between them should still be ok. I pulled them off a futuresource chart and there is no label saying what the scale of the volume is, - I mean does 50,000 equal 50,000 contracts, or 50,000 units of 1,000 each...? ow - now my head is really throbbing.... well it doesn't matter... Where is that shady spot ....?
 

neil

Legendary member
5,167 748
Your opinion is ok but

Diana432 said:
Some nonsense, some good points, but all traken from Tom Williams book.
I wouldn't waste time reading it.

I disagree, I have read it and found it extremely profitable such that I stopped using indicators and use p and v alone. ( OK I use a 39ema purely to focus my old eyes. But be aware it still takes a lot of study , chart observation and practice before you become profitable.
 
 
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