Technical Analysis Volume Analysis

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 be done by buying at the market or limit orders as it would destabilise prices, causing an unreadable situation.

‘Whip-sawing’ – prices marked rapidly up and down – is used to shake out the crowd and catch stop losses, but the real reason is to process large orders while covering any strategy and not giving the game away at the same time. When the market starts to trend, we say the large operators have control. They know that there are thousands of stop losses out there waiting to be triggered. This gives them the opportunity to process large orders and conceal their true intentions as they attract other traders, who can see their actions and act immediately to better their own accounts by reading volume. For example, ultra high volume on a down bar should stop the decline, with demand swamping supply.

The other advantage professional traders will have is the news: they will already have positioned themselves in advance of news and will try to wrong-foot as many traders as possible, gunning for stop losses and misleading the crowd into thinking the opposite of their true intentions. Why is it that bad news always appears in the last two weeks of a bear market and good news always at the top of a bull market? It is done to put you under pressure at the bottom and to make you hunger for more at the top of a bull market. This allows the operators to unload large blocks of stock or futures contracts at the best possible prices and to reaccumulate at the bottom to increase profits – usually at a large loss to the crowd. The cycle is then repeated over and over, giving us bull markets and bear markets – which is why you are bombarded day and night with news on earnings, unemployment and payrolls.

These operators know that you are ruled by three things in the market: fear, hope and greed. Fear of missing out, hope that when you are losing prices will recover and you can close out at break-even and greed that when you have a profitable position you hang on for greater profits and often fail to see the tide coming in.

By studying volume and its relationship to price, you can begin to detect subtle changes in supply and demand. You will see when the large operators are active and, by observing the results of their actions, you should begin to see a picture of the ongoing market unfolding before you in a trading session. Let’s say you are sitting in front of your computer one day, watching a bar chart, and you see a large amount of volume on an up bar. You will – because you have been told this is so – assume that strength always appears on up bars and weakness always appears on down bars. But in fact, up bars with excessive volume are a sign of weakness, as down bars with high volume show strength.

But how can this be true? Imagine you are an institution with a large block to dispose of: how can you do this without moving the price against you? Answer: by marking up the price to bring in buyers. Rising prices create demand, demand does not create rising prices. If you see prices rising, you are more likely to buy than sell as you will expect to make a profit as prices continue to rise. But if you cannot read volume, your image of these rising prices will distort the true picture: you will not see the excessive volume indicating weakness.

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

caption: Professional Activity

Non-professional activity

caption: Non-Professional Activity

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).
 
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ducati998 said:
To understand where the underlying are going, then VOLUME, is pretty much a complete waste of time. Price is very relevant, but not how DBP advocates, watching bars on charts, is for daytraders, and their success rate is abysmally low.

Watching bars on charts is merely a convenience and a choice, not a requirement, and it's no more related to daytrading than trading via monthlies.

And if you're defining "VOLUME" as a bar of some sort, then you're at least partly correct.
 
just checking my facts

Hi Ducati,
Thanks for your interest, and lets stick to the S&P - just to make it easier on my brain OK? There is an S&P index which is calculated (derived) from the value of the stocks included in the index. It is just a published number, not a tradeable instrument. Right?

There are also S&P futures contracts. Traders speculate here about what they think the S&P index will be worth in the future. If the futures contracts gets too far away from the S&P calculated value (say the futures are higher than the calulated index), then the arbing programs go into action. When the futures get "too high" there are programs that sell the S&P futures contracts and/or buy the underlying stock. Right?

The S&P futures contracts come in 2 sizes. (the e-mini is 1/5 the size of the S&P full contract).

My question is about the arbing programs that keep the S&P full size futures and S&P e-mini futures and the underlying stocks all in relative tandem when the markets are open.

You say
to understand where the futures are going, you must understand where the underlying are going.
but that seems too simple to me. (and backwards of what I have often heard, though I don't why the futures would always lead the underlying stock either). I'm guessing that it might be more of a push me / pull you kind of action, and that the instrument with the most weight (that is the most liquid volume) wags the other two. - but that's just speculation too.

In any case, if we were to use a computer to graph aggregate price and volume for the underlying stocks, and compare those to the price and volume graphs for the each of the futures contracts, would we learn anything?
---------------------------------------------------------------
The flies generally follow the herd, but if the flies get thick enough, they can actually cause the herd to move too...

JO
 
mmm, if you were charged with switching a large pension fund out of stocks and into bonds I wonder if you might have a dabble in the futures before you start ;)
 
JO, what exactly is it that you're trying to do? Are you interested in the abstract or the hypothetical? Or are you asking a trading question?
 
JumpOff said:
In any case, if we were to use a computer to graph aggregate price and volume for the underlying stocks, and compare those to the price and volume graphs for the each of the futures contracts, would we learn anything?
---------------------------------------------------------------
The flies generally follow the herd, but if the flies get thick enough, they can actually cause the herd to move too...

JO
She is simply asking a question at an academic level.


Hello Jumpoff, I am going to answer your question for you, otherwise you will only get misdirected.

The answer is no.

The reason is that the underlying is subject to its own supply demand forces.

The derivative is subject to separate supply demand forces.

Although both may be tilted in the same direction, it does not mean that they are tilted in harmony to each other. This means quite simply that they are not yoked in unison to the same supply demand pressures.
 
Running a chart of both at the same time would seem to imply an opportunity for additional insights then Socrates. Is that true in your experience?
 
I used to do it. I don't find it necessary any more nowadays. I occasionally refer to the underlying index more out of curiosity than for any valid reason.
 
dbphoenix said:
JO, what exactly is it that you're trying to do? Are you interested in the abstract or the hypothetical? Or are you asking a trading question?
I'm winnowing. Abstract and Hypothetical questions occasionally lead to practical applications. Just looking to see what can be safely ignored, and which information should command my full attention.
JO
 
SOCRATES said:
The reason is that the underlying is subject to its own supply demand forces.

The derivative is subject to separate supply demand forces.

Although both may be tilted in the same direction, it does not mean that they are tilted in harmony to each other. This means quite simply that they are not yoked in unison to the same supply demand pressures.

So the fact that they appear to move in tandem is a result of similar, but separate forces, and not arbing programs?
JO
 
JumpOff said:
I'm winnowing. Abstract and Hypothetical questions occasionally lead to practical applications. Just looking to see what can be safely ignored, and which information should command my full attention.
JO

Again, that depends on what you're trying to do with it. Books have been written which address your questions, so it would help to narrow your focus.

Everything is of course related in some way, so if you're asking general questions about how various market segments are related to each other, then it is unlikely that you would find the answers that you want here since the question is not related to the thread and the sorts of people who would have something to say are not likely to see it.

On the other hand, if you're asking a trading-related question, then the answer is the same that I've provided before: it doesn't make any difference. If you're trading the ES, trade the ES. If you're trading the S&P, trade the S&P. Trying to calculate the movements and volumes of even the most heavily-weighted components in order to tell you what to do won't help you much unless you're trading off a weekly chart, though you might be able to do it off a daily chart if you're especially aggressive. However, since you're trying to trade for only a few hours in the early morning, this seems not to be a route that is open to you and will not likely help you define your setup.

Nor would it help you if you were trading stocks. If you're daytrading Schlumberger, daytrade Schlumberger, regardless of what Baker-Hughes is doing. If you're trading over a longer timeframe, you'll want to know what the sister stocks and the sector are doing, but for what you're doing, it doesn't matter.

So, again, knowing what you're trying to do will help people make pertinent responses.

[Edit: I should point out, of course, as I have in and out of the group, that if the interrelationships that you're curious about will have an appreciable effect on your trading, you'll be able to find that out through research since they will be true, as opposed to taking somebody else's word for it which may only be opinion.]
 
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Frugi-I don't think i signed at same time as diana or andry but I have same view as them. No dig at T Williams..but this article is a copy of his work . I dont like plagiary.

I also use anonymous proxy because as a woman trader i will wish to be anonymous. You have revealed andry and diana use anon proxy and i think you have abused your position...it is because people like you lurking or taking responsible positions and abusing origination of ip address that i remain anonymous. No dig at copy cat Manby or at T Williams because I attended VSA courses and like T Williams work. But this article is a very poor copy of T Wiiliams. And very poor of you to reveal ip source.
 
Jennjam said:
Frugi-I don't think i signed at same time as diana or andry but I have same view as them. No dig at T Williams..but this article is a copy of his work . I dont like plagiary.
.

While it may be a "copy" of Williams' work, it's not plagiarism since Manby acknowledges Wyckoff as the source, and Wyckoff is the source of Williams' work as well. As long as one acknowledges the source, it's not plagiarism, as with Edwards acknowledging Schabacker (his brother-in-law) as the source of most of the material in Edwards' and Magee's classic (Schabacker died before the work was complete). Granted, few people know that the work was Schabacker's, but that's not Edwards' problem since he made the acknowledgement.

A great deal of what's been written since Neil and Dunnigan has been what one might call "unoriginal". But now that so many of these works have come back into print, enquiring minds can discover this for themselves.
 
As a footnote I must remark that none of this is about learning but something completely different.
I find it all quite entertaining, as forces are exerted this way and that to create what can only be identified as spin.
 
JumpOff said:
So the fact that they appear to move in tandem is a result of similar, but separate forces, and not arbing programs?
JO
Yes, that is correct, and additionally, you must not allow yourself to be confused by spin.
 
Jennjam said:
Frugi-I don't think i signed at same time as diana or andry but I have same view as them. No dig at T Williams..but this article is a copy of his work . I dont like plagiary.

I also use anonymous proxy because as a woman trader i will wish to be anonymous. You have revealed andry and diana use anon proxy and i think you have abused your position...it is because people like you lurking or taking responsible positions and abusing origination of ip address that i remain anonymous. No dig at copy cat Manby or at T Williams because I attended VSA courses and like T Williams work. But this article is a very poor copy of T Wiiliams. And very poor of you to reveal ip source.

Hey, to those of you that don't know it, Sebastian Manby is Tom Williams protegé. Whatever he writes is probably just the same as Tom would have done. Do your homework before you call it plagiary.
 
DBP,

And if you're defining "VOLUME" as a bar of some sort, then you're at least partly correct.

No, I was not defining volume at all.
What I actually said was..........Volume in respect to where a FUTURES contract will trade, IS A COMPLETE WASTE OF TIME.

As you simply decided to take the quote completely out of context, you thus perverted the point being made.

Watching bars on charts is merely a convenience and a choice, not a requirement, and it's no more related to daytrading than trading via monthlies.

True, however as a generalisation, excepting pit-traders, how many daytraders would not use a chart, as compared to those that do?
I suspect that my generalisation would be fairly accurate. However, should I be proven to be incorrect, I shall gladly retract my "generalisation".

JO,

Thanks for your interest, and lets stick to the S&P - just to make it easier on my brain OK? There is an S&P index which is calculated (derived) from the value of the stocks included in the index. It is just a published number, not a tradeable instrument. Right?

The S&P500, is an index of 500 stocks, which underlies the published figure each day, OPEN,CLOSE, HIGH, LOW.

You can trade it three ways,
1.......Buy every constituent stock ( ignoring any issues of weighting )
2.......Buy the Exchange Traded Fund, the ETF, or tracking fund
3......Buy 1, of 2, Futures contracts, e-mini, or the big boy.

The simple fact of the matter is this. A Futures contract is a DERIVATIVE.
All derivatives, DERIVE their value from an underlying commodity, wheat, oil, etc.
The S&P Futures contracts derive their value from the UNDERLYING STOCKS that form the index, constituting the S&P500.........They are a FINANCIAL DERIVATIVE.


but that seems too simple to me. (and backwards of what I have often heard, though I don't why the futures would always lead the underlying stock either). I'm guessing that it might be more of a push me / pull you kind of action, and that the instrument with the most weight (that is the most liquid volume) wags the other two. - but that's just speculation too.

Now, as the NYSE closes to trading each day, and the Futures do not, what happens is that the futures loses the correlation with the underlying stocks overnight.

In the morning, pre-market, all eyes focus on where the futures are TRADING, as this is thought to provide valuable information as to where the INDEX will open.

If the futures are high, then a high open for the market, low, then low.
Now this is fine and can work out this way.
What happens though, is that lets say 1 stock, with a heavy weighting, during earnings season comes in with a bad result in it's earnings, and sells off hard.

The futures, however were trading high, expecting a good result, and as a CONSEQUENCE of the weighting, and the hard sell off, the INDEX, instead of opening high ( being influenced by the futures ) OPENS LOW.

The Futures, will now HAVE to trade down, as their value is derived from the index. Irrelevant if your buying volume shows demand.......makes no difference, THE VALUE IS BY LAW LINKED TO THE UNDERLYING.

So, in summation, when there are no FUNDAMENTALS in play, and just speculation, the Futures may INFLUENCE the INDEX, and conversely the opposite is true.
However, when fundamentals EFFECT a change in the STOCKS, the index changes followed by the futures.

SOCRATES
The answer is no.
The reason is that the underlying is subject to its own supply demand forces
The derivative is subject to separate supply demand forces
Although both may be tilted in the same direction, it does not mean that they are tilted in harmony to each other. This means quite simply that they are not yoked in unison to the same supply demand pressures.

You are quite simply wrong.
Not only are you wrong, but you are dangerously wrong.
As such, I think that your postings need to be monitored by T2W, as the information you impart is potentially damaging to traders.

Futures contracts originally developed for commodities, the reason being PRODUCERS needed to hedge their production.

If I was a farmer growing wheat, I would before growing it, want to know that it was economically viable for me to do so.

A futures contract would allow me to BUY or SELL an offsetting position to my produce, ie a hedge.

In this scenario, the DERIVATIVE can fluctuate in price UNTIL, wheat harvest draws close, and the extent of the harvest becomes known.....SUPPLY, this will then tie the price DEMAND to the supply, ie the underlying.

Financial instruments ( stocks ), however are MARKED TO MARKET EVERY DAY.
Therefore, supply and demand of the underlying ie, value, are known every day, therefore, the DERIVATIVE is TIED to the underlying everyday.

Therefore, the demand for a derivative may skyrocket, and a buying frenzy ensue, but, if the UNDERLYING loses value, and drops in value......THE DERIVATIVE also loses value, unless, in the case of options, you have a time value component, in addition to intrinsic value.
In that case, intrinsic value drops ( linked to the underlying ) but time value remains, but that will also shrink, just not by the amount you may expect. This is an entire subject of it's own however.

But this is not the case for a financial futures contract. There is no time value.
The forward months are a relic from the commodities, where physical delivery was part of the contract.

DBP,

On the other hand, if you're asking a trading-related question, then the answer is the same that I've provided before: it doesn't make any difference. If you're trading the ES, trade the ES. If you're trading the S&P, trade the S&P. Trying to calculate the movements and volumes of even the most heavily-weighted components in order to tell you what to do won't help you much unless you're trading off a weekly chart, though you might be able to do it off a daily chart if you're especially aggressive. However, since you're trying to trade for only a few hours in the early morning, this seems not to be a route that is open to you and will not likely help you define your setup.

But, you see, it does make a difference.
She is trying to understand the Structure of the Market. The structure of the market will influence the FUNCTION of the market.

The relevant example is volume.
Volume in the futures market, can at specific times mean absolutely **** all.
If you are basing your trading decision on an analysis of volume at this time, you will have a loss on your books.

cheers d998
 
ducati998 said:
No, I was not defining volume at all.
What I actually said was..........Volume in respect to where a FUTURES contract will trade, IS A COMPLETE WASTE OF TIME.
Actually, you didn't. But, as you like.
True, however as a generalisation, excepting pit-traders, how many daytraders would not use a chart, as compared to those that do?
I have no idea. What I said was that it was not a requirement, and it's not. People were daytrading long before charts were available.

No need to retract your generalization, tho. It's not important.
But, you see, it does make a difference.
She is trying to understand the Structure of the Market. The structure of the market will influence the FUNCTION of the market.
Whether it makes a difference or not to her trading depends on what she wants to do with it. But since I've been working with her for several months, I'll wait to hear from her, thanks.
 
One thing that is overwhelmingly reinforced on thread after thread and that is that traders will always disagree with each other. This is, of course, great news for the few who continue to make money on an ongoing basis from the many. I hope that the disagreements continue as I am doing quite nicely from those who take the opposite side of my trades and if we all agreed then this opportunity would cease to exist. So I would like to thank all those in the past, present and future who have, do now and will continue to diasagree with me. :)


Paul
 
Paul

Are you p*issed ?

You usually write rather more intelligently than your previous post.
 
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