“Volume” is mystery
If you can’t spot it, Don’t trade
by Gail Mercer, Hawkeye Traders | June 29, 2009
PrintThere 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.
Copyright © 2009 Gail Mercer
Editorial Archive
For more details on Volume based trading please subscribe to our newsletter at: http://www.HawkeyeTraders.com
Contact Information
