Volume is Important
Below you will find some points about volume and volume-based technical analysis. In particular, we have attempted to gather some statements that will help to better understand volume.
- Volume is always a two-sided matter. There is always a buyer and a seller. When the volume equals one, it means that one seller sold one share to one buyer. If the volume equals one million, it means that a group of sellers have sold one million shares to another group of buyers. By itself, volume does not show whether traders are selling or buying, nor does it show whether there more buyers or sellers. The Volume shows the number of shares transferred from sellers to buyers.
- If the price declines, it means that sellers are willing to sell at a cheaper price than the "ask price" and that there are not enough buyers to satisfy the demand of these sellers. If the price moves up, it means that the buyers are ready to pay a higher price than the "bid price" and that there are not enough sellers to satisfy their demand.
- There are four major factors that can be obtained from volume analysis:
- Money Flow - Money Flow allows one to see whether the money is coming in or going out. Changes in the money flow allow one to spot changes in the trend.
- Accumulation- Volume allows one to see how strongly a stock, index or market is overbought or oversold by measuring the intensity of trading during the price advance or price decline. The more volume accumulated during a trend, the stronger the reversal that can be expected.
- Volume Surges and Volume Spikes - Volume allows one to spot periods of panic selling and greedy buying that are revealed through big volume surges and volume spikes. As was mentioned above, volume is always a two-sided matter. For each buyer, there is a seller and a volume surge means that a group of traders have decided to satisfy the demand of other traders.
A volume surge during a price decline revels that a group of institutional traders (who have a great deal of money) have became attracted by the low bargain price at that moment and decided to buy in large quantities from the group of panic traders who were pushing the price down. Alternatively, a volume surge during a price advance reveals that the institutional traders have decided to sell in large quantities to greedy buyers. As a rule, big volume surges lead to a shift in the supply/demand balance, followed by a trend reversal.
- Liquidity - the volume allows one to see how liquid a stock or any other security is. The higher the average volume is, the more liquid the stock is and, also, the easier it is to sell or buy this stock. Such stocks as QQQ and SPY are among the most liquid stocks in the world - they have the highest average daily trading volumes.
- Most of the volume-based technical indicators are leading indicators - indicators that predict trend reversals.
- When it comes to volume analysis, the best results can be achieved when volume indicators are applied to highly liquid stocks or to the indexes and exchanges. Accordingly, many professional and institutional traders apply volume analysis to the S&P 500 (^SPX), NASDAQ 100 (^NDX), Dow Jones Industrials (^DJI) and other indexes to trade index derivatives (QQQ, SPY, DIA, XLF, IWM, etc), emini index futures, index options, options on index derivatives, index funds and other securities and commodities that track the performance of indexes.
- The volume of the NYSE (^NYA),AMEX(^XAX) and NASDAQ (^COMP) exchanges have become the benchmark of the U.S. Economy's health.
Main points of Selling /Buying Volume based Technical Analysis
- Intraday volume surges reveal institutional money entering and exiting the market, thus letting you anticipate trend reversals;
- Volume moving averages and our patented modulated volume technology reveal Selling and Buying surges;
- A volume surge that appears as the index is rallying (i.e., occurs during a price advance) indicates that traders are Buying in large quantities. We call such volume spikes "Buying surges";
- A volume surge that appears as the index is declining (i.e., when prices are weakening) indicates that traders are Selling in large quantities. We call such volume spikes "Selling surges";
- The larger the magnitude of a volume surge - and the longer its duration - the higher the probability that a strong trend reversal is imminent;
- As a general rule, in order to stop and reverse an ongoing trend, a volume surge or accumulated volume has to be about equal to the volume surge (or accumulated volume) that initially prompted the current trend. In other words, in order to reverse a prevailing trend, a volume surge (or previously accumulated volume) has to "process" the prior volume surge (or previously accumulated volume).
- Our SBV indicator reveals Selling (red indicator) and Buying (green indicator) surges and discloses their magnitude and duration - thus indicating the potential strength of an anticipated trend reversal;
- Increasing VMA period allows you to see the accumulation of Selling and Buying volume on the same view and recommended for more conservative trading.
Decreasing the VMA period allows you to highlight particular volume surges - this is recommended for more aggressive traders.
- The market will not turn after every volume surge – sometimes not even after the appearance of a significant surge. Instead, reactions to volume surges may be delayed. However, the more volume surges occur in one direction, the more pronounced we can anticipate a coming trend reversal to be:
- For instance, when two volume surges appear in the same direction and are associated with an SBV oscillator reading of 30%, this situation could lead to a trend reversal that is similar in strength as a turnaround generated by a single volume surge where the SBV oscillator shows a reading of 60%.
- In order to use the SBV oscillator to signal trade entry and exits, we invite you to experiment with various chart settings and critical levels for the SBV oscillator. It all depends on the current market stage, your type of trading, as well as your personal risk tolerance;
- The SBV oscillator reveals the magnitude and duration of volume surges in relation to the volume surges that occurred within a time span three times longer than the timeframe you are currently charting. For instance, if you are presently analyzing a one-day chart, a 3-day timeframe is used to define the magnitude and duration of the volume surges;
- All types of traders - even intraday scalpers - should be aware of the currently prevailing trend: Intraday scalpers and swing traders should know about the current short-term trend; Short-term traders must be informed about the direction of the mid-term trend; Mid-term traders have to know where the market might be going over the long run. This knowledge should be used in harmony with the prevailing trend. As a reference, we recommend the following chart views:
- Intraday scalpers may use 1- and 5-day chart views to define the prevailing trend;
- Swing traders may use 5- to 15-day chart views to define the prevailing trend;
- Mid-term traders may refer to 3-month to 1-year chart views to define the prevailing trend;
- Long-term traders may refer to charts spanning 4 - 7 years to define the prevailing long-term trend.
- Depending on your personal trading style, you could use the following timeframes to analyze SBV charts:
- 2-hour and 1-day views for intraday scalping and day-trading;
- 5- to 30-day views for swing and other short-term trading;
- 60-day to 2-year views for mid-term trades;
- 3- to 10-year views for long-term trades;
- For each view period, the chart automatically selects two volume moving averages (VMA1 and VMA2). You can change the VMA settings to suit your personal risk tolerance. Increase the settings for a more conservative trading approach; decrease them if you are willing to take more risk;
- You can evaluate the performance of any trading system using the SBV oscillator (such as a system you built in accordance with your personal trading style and risk tolerance) by scrolling back in history on our charts (use the arrow buttons found at the bottom left-hand corner of our charts). For selected emini contracts, an intraday 1-minute history is available dating back to September 1999.
For instance, assume you plan to trade as follows: Expectation of a 3-point profit; application of a 3-point stop-loss; take trades based on the first appearing volume surge characterized by an SBV oscillator reading of 40%. Prior to trading this approach, you could scroll back in history to see the win/loss ratio associated with this particular trading strategy.
Since volume surges are indicative of a large number of contracts (or shares) changing hands, the number of lost trades is small and the probability of winning trades is high.
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