“Volume” is mystery

If you can’t spot it, Don’t trade

by Gail Mercer, Hawkeye Traders | June 29, 2009

There are many articles that have been written on volume over the years. Most traders have learned about volume in their studies of the markets, however, few really give attention on the value of change in volume and how it affects their trading. Understanding the way volume plays in the market is the key to be successful in trading. The greatest fan of volume was Richard Wyckoff; believed that understanding the context and principles of market volume was the path to success.

The volume is the number of shares, contracts or bonds traded during a specific period of time. It can be daily, weekly, monthly, minutes or tick volume in any trading markets. Each volume bar represents the action between ‘buyers and sellers’. Volume is normally displayed as a histogram in the chart.

Volume is the indication of Supply and demand. The old economic theory about the relations of supply and demand determines the price movements. When demand (buyers) increases supply (sellers) decreases or when supply increases demand decreases. When there is a change in price, it is the result of change in demand and supply. When a change in market sentiment happen most traders don't find out until it is too late. Trading volume indicates the trader, to know when and where a change in sentiment is going to take place, and act accordingly.

Volume Analyzing is a very powerful tool, which has some predicting capabilities. Volume typically goes with the trend. Volume represents a complete market picture. High Volume indicates that larger than usual trading activity arise on that trading period. When volume starts to increase, it is a positive sign of buyers or sellers and the direction of the price trend. When volume starts declining in an uptrend, it can be a sign of price trend reversal.

Typical volume only measures the number of buyers and sellers in the market for that particular price bar. This type of volume measurement fails to look at the range of the bar or the open/close of the bar. So if the number of buyers is greater than the number of sellers, the bar is green. If the number of sellers is greater than the number of buyers, then the bar is red. This is a very simplistic measurement of volume and is only valid for that particular price bar.

With Volume Spread Analysis, we take an in-depth look at not only the current price bar but the previous price bars, as well as the open, close, high and low of the bar. In other words, when looking at the range of the bars, who had more control, buyers, sellers, or was the volume neutral. By using this method we can actually identify when the professional money is entering or exiting the market.

In any markets before you execute your trade, it is very important to know, who is controlling the market in that particular time and day which is buyers or sellers. If you trading futures you can watch who is controlling the price using a KISS indicator.

Additionally, FOREX does not have true volume, we can use “Tick Count” for measuring volume. If trading a tick chart, all volume bars will be of the same height. However, if we use a minute chart, then we can see the difference volume bar heights. The difference with the VSA indicator and a normal volume indicator is the measurement of volume per x amount of bars, plus a standard deviation. This allows us to see when buyers or sellers are coming into the market earlier.

The theory behind VSA is that volume leads price action -- not vice versa. The volume indicator gives you a heads up on who is controlling price. Then we look to the trend indicator to show us the momentum of a move. We look to the wide bar and volume radar to alert us to any unusual price or volume actions. We then take profits out using our Levels, while minimizing our risk with two dynamic stops, the crash barrier and stop. A long-term trader can maximize his profits in a trend by using the Adds.

Understanding Volume

the Key to Unlocking Profits - Part 1

by Gail Mercer, Hawkeye Traders | July 22, 2009

Volume in the market is as important is to your car. Prices do not move without buyers and/or sellers. Since many of you have repeatedly asked for more information on volume, we have decided to do a complete series on volume over the course of the next four weeks. This series is aimed at giving you fundamental understanding volume behaviors. Each week we will add to the information from the previous week.

To help in understanding typical volume and price behavior, post these notes beside your computer and learn to identify the different volume behaviors as they occur on your charts.

Normal Volume Behavior:

• Volume is highest before congestion
• Volume is lowest as it moves deeper into congestion
• Volume increases with a valid breakout of congestion and then subsides as the trend begins. (Look for the last Hawkeye Pivot being taken out.)
• Volume increases with major reversals, approximately for the next 5-7 timeframes
• Volume should move with trend strength, ie if trend dots are up and on an angle greater that 45%.
• Volume should be lower on the second double top/bottom formations showing lack of selling. Then volume will pick up and a trend will be established.

Abnormal Volume Behavior:
Congestion Areas:

• If heavier volume appears at the low end of congestion area, buying is being supported and prices tend to go up after breaking out of the upper price resistance level.
• If heavier volume appears at the higher price level in the congestion area, then there are more sellers than buyers. Prices will eventually decline from the higher support area of the congestion zone.
• Volume should increase during the breakout then subside as the trend begins to form. However, if volume stays high after the breakout and prices move too strongly, then the breakout will not be valid and prices will move back into congestion until fair value has been established then continue in trend (in other words price has got ahead of its self and it requires attendant volume to confirm trend direction.)
• If price retraces after a breakout from congestion on high volume, and bounces off the outside edge of congestion, and then volume picks up again, this is a valid breakout.

Volume should be in the direction of the breakout. However, if volume does not confirm the direction of the breakout, then prices will likely go in the opposite direction. Remember, normal volume breakout increases with the breakout. Therefore, if you see a breakout with low volume, anticipate entering in the opposite direction as price cannot continue in this direction on low volume.

Hawkeye Flexible Strategy based on Volume

“Volume leads the price!”

Volume Spikes

Volume Spikes are sudden and abrupt rises in volume (not just an increase in volume but a significant and abrupt increase in volume). Volume spikes are normally easily identifiable on a chart because they stand out when compared to previous volume bars.

Large volume spikes at the top of markets should be accompanied by very little upward price movement at the end of the move. This is what foretells the end of the advance. If you get volume spikes with large or comparable price movement, then the price could continue upwards. The key is price hitting a resistance line or seeing a small range bar on high volume. The small range bar shows that there is resistance (or support in the case of large volume after a decline).

If you are in a trade and notice high volume bars without advances in prices, as this is generally an indication of an impending reversal because the buyers (or sellers in downtrend) are drying up. Additionally, when you see Wide Bars or multiple violent price swings with a volume spike, this indicates that the price will typically reverse very soon.

Narrow Range Bar

A narrow ranging bar with high volume is an indication of weakness in the market trend. The reasoning is quite simple. In an uptrend, a bar with high volume should expand the range of the bar. If there is high volume, without an expansion of price, then it is a warning that there is weakness in the overall trend.

Upthrust

An upthrust is normally seen at the top of a bull market markets and, when combined with high volume, indicate a potential reversal. An upthrust occurs when, in an uptrend, there is a wide ranging bar that closes at either the middle or low of the price bar. If volume is ultra high, look for a reversal.

Buying Climax

After a substantial upward price movement (bull market move), a wide ranging bar that closes at the high (making a new high) with high volume indicates a buying climax. Remember, volume should increase at the beginning of a trend and then subsides.

Selling Climax

A wide spread down, with high volume, and the price bar closes at the high of the bar is known as a selling climax. Normally with a wide spread bar down, with sellers dominating the market, the price bar would close at the low of the price bar. When the price closes at the high of the price bar, then sellers have diminished and buyers are entering long positions.

Distribution
Distribution is the process of sellers absorbing the buyers in the market, very discreetly so that other traders do not recognize they are distributing their shares. Distribution always begins occurring at the top of bull markets but typically is not recognized until afterwards.

A cursor that the market is going into a distribution phase when prices have been rising in an uptrend and then a buying climax** occurs -- we discussed this last week (after a substantial upward price movement, a wide ranging bar occurs at the top of the market (making a new high, and closes near the top of the price bar with high volume).

Buying Climax

After the buying climax, heavy volume remains in the market, but price are no longer increasing at the same rate. This volume pattern indicates that the buyers are being ABSORBED by the sellers, in other words, there is no longer a demand for higher prices.

Although this exact point may not be the reversal point, you will see price go into consolidation and eventually breaks to the downside because buyers become frustrated and stop trying to increase the price.

The key here is the heavy volume which is not confirmed by price -- BEWARE.

Distribution

Accumulation
At the end of bear markets, accumulation begins -- buyers entering the market and accumulating shares very discreetly so that other traders do not realize they are actually taking long positions. The precursor to the accumulation phase is the opposite of the buying climax -- a selling climax**, which we discussed last week, as well (after prices have been moving downwards, a wide ranging bar with high volume occurs with the price bar closing at the high of the price bar).

Selling Climax

After the selling climax, price will cease to decline at the same rate. This means that price has reached a support area and that buyers are now absorbing the sellers. This normally occurs during a consolidation period, in which the buyers are absorbing the sellers. Sellers become frustrated as they are unable to cause the prices to go down, and eventually an upside breakout will occur.

Accumulation

Again, the key here is the heavy volume which is not confirmed by price -- BEWARE.

A great example of these patterns can be seen in the chart below for Citigroup. In October 2008, there was a wide ranging bar, with high volume and a close up around the high of the bar. This alerted us to a potential of the market going into an Accumulation phase. However, when markets go down, they do so with such force, that it takes a while for them to stop. Nigel calls this the "tanker effect", which is when you have a tanker moving at 65 miles per hour, once he applies his brakes he does not immediately stop. Instead, he continues moving for an additional distance until eventually he stops.

In January 2009, the chart shows a volume spike, which failed to move prices lower. This is our second indication that prices may be reversing in the near future. Thereafter, we see that price fails to move down, moving into a consolidation phase with the buyers are absorbing the sellers in the market. Since the entry criteria has not been met, we simply put the Stock on our Watch list and move on to the next prospect.

**Although the buying or selling climax is considered a pre-cursor to the accumulation or distribution phase, the climax can also come at the beginning or ending of the accumulation or distribution phase, as well.