T2W Bot

Staff member
A few weeks ago I talked to 15 different traders: 5 of them have been trading for less than a year, 5 of them have been trading for 1-2 years, and 5 of them have been trading for over 2 years. I asked each of them if they use volume in their trading, and because they know how important I think volume and price action are, they all responded "yes".
Having established that all 15 of these traders are using volume, I wanted to know exactly how they are using it and whether or not they are using it correctly. I remember as a newer trader I always would say that I was using volume but I really didn’t know how to properly utilize volume. So I spend just a minute or so showing each of these traders a chart and asked them to analyze exactly what the volume on the chart is telling us and where we would want to take a position. The results of the survey showed the following:
image1.jpg

You can see that only 3 out of 15...

Continue reading...
 
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timsk

Legendary member
The article is a good basic introduction to volume, but it doesn't address one fundamental problem faced by most traders when evaluating the relationship between price and the standard volume histogram like the one used in the article. Namely, the ability - or inability - to distinguish easily between the different types of volume.

For example, the histogram prints a large bar and is accompanied by a large bull candle. The obvious conclusion is that demand is greater than supply, thus causing price to rise. However, what it doesn't tell you is whether the volume is created by new buyers entering the market or short sellers buying to cover. The reverse applies to volume that accompanies a bearish price move: is it fresh shorts entering the market or long holders closing out their positions? The distinction is an important one because a bull rally fuelled by short coving can quickly peter out when the shorts have closed all their positions. So, in such cases, a move up isn't the result of demand at all, merely a desire to get out of the market with a profit or to minimise a loss. Moreover, those market participants that are able to make the distinction between the different types of volume will then be able to initiate new short positions at a higher price and repeat the same exercise all over again.

If Mr. Egan would care to outline how we can make this distinction, then that really would be a valuable contribution!
;)
Tim.
 

Splitlink

Legendary member
The article is a good basic introduction to volume, but it doesn't address one fundamental problem faced by most traders when evaluating the relationship between price and the standard volume histogram like the one used in the article. Namely, the ability - or inability - to distinguish easily between the different types of volume.

For example, the histogram prints a large bar and is accompanied by a large bull candle. The obvious conclusion is that demand is greater than supply, thus causing price to rise. However, what it doesn't tell you is whether the volume is created by new buyers entering the market or short sellers buying to cover. The reverse applies to volume that accompanies a bearish price move: is it fresh shorts entering the market or long holders closing out their positions? The distinction is an important one because a bull rally fuelled by short coving can quickly peter out when the shorts have closed all their positions. So, in such cases, a move up isn't the result of demand at all, merely a desire to get out of the market with a profit or to minimise a loss. Moreover, those market participants that are able to make the distinction between the different types of volume will then be able to initiate new short positions at a higher price and repeat the same exercise all over again.

If Mr. Egan would care to outline how we can make this distinction, then that really would be a valuable contribution!
;)
Tim.

Hi, Tim,

Before internet, in the days when I used to buy the FT, there used to be a box in the data section that showed the bargains made the previous day on the FT100.

A person called Eustace Storey who was, himself, a stockbroker, wrote a book on a system that he had created. I bought that book and still have it, tattered and torn, on my shelf. It was one of the inexpensive systems around and I am sure that he wrote it for personal satisfaction -- not for financial gain.

His idea was that the volume of shares was less important than the bargains done, because an individual would make a trade according to the size of his budget. The trade size, large or small, is important to every trader, regardless of the number of shares.

So, a wealthy trader, buying several million shares over four trades would have, perhaps, less significance than a dozen smaller traders buyng the same amount over the same period.

In those days the trader did his own charting and Storey used a system called "Price plus Volume" which should have been called "Price plus Bargains" and it was quite easy to plot, just like P&F, but the number of bargains was added to the top and bottoms of the columns.

Maybe I could scan one of the diagrams and send it over although this information is not available now and is purely academic.

My point is that I agree with you, Tim, volume information is missing something and I believe that the number of bargains published provided the needed part.
 
 
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