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Looking at the chart of Netflix above, do you honestly think the stock will exceed the first 5-minute bar with increased volume? Of course not! While this charting example did not include a break of the daily high, when you look for stocks that are breaking highs, just look for heavy volume. Again, if we are within the margins, please do not beat yourself up over a few thousand shares. In a perfect world, the volume would expand on the breakout and allow you to eat most of the gains on the impulsive move higher. Below is an example of this scenario.
Take a look at the below chart without scrolling too far and tell me if the stock will continue in the direction of the trend or reverse? The answer to my question — you have no idea if the stock will have a valid breakout. From the chart, you could see that the stock had nice down volume and only one green candle before the breakdown took place.
This is where experience and money management comes into play because you have to take a chance on the trade. You would have known you were in a winner once you saw the volume pick up on the breakdown as illustrated in the chart and the price action began to break down with ease.
Even with this caveat, however, there are reasons to believe it to be a sensible yardstick by which to measure by. This would provide little confidence to traders in terms of this being a sustainable downward move. These price regions are where the institutions buy and sell, creating these natural levels. They may be used by those companies to build a profile of your interests and show you relevant adverts on other sites. A sufficiently large number of people look at these values regularly, and put stock in what they are saying as to influence market behaviour. They help us to know which pages are the most and least popular and see how visitors move around the site. The basket of currencies includes the Australian dollar, a key currency for commodities.
This concept of increasing volume on a breakout was also stated in the book Mastering Technical Analysis. While a secondary indication, if the volume did not increase in the direction of the trend, this was a warning sign that the trend may not be valid. For those that follow the blog, you know that I like to enter the position on a new daily high with increased volume. You will need to place your stops slightly below the high to ensure you are not caught in a trap. This strategy works for both long and short positions. The key again is looking for the expansion in volume prior to entering the trade.
When a stock is moving higher in a stair-step approach, you will want to see volume increase on each successive high and decrease on each pullback. The underlying message is there is more positive volume as the stock is moving higher, thus confirming the health of the trend. This sort of confirmation in the volume activity is usually a result of a stock in an impulsive phase of a trend. The volume increase in the direction of the primary trend is something you will generally see as stocks progress throughout the day.
You will see the strong move into the 10 am time frame, a consolidation period and then acceleration from noon until the close. For this strategy, you will want to wait for the trade to develop in the morning and look to take a position after 11 am. As the stock moves in your favor, you should continuously monitor the volume activity to see if the move is in jeopardy of reversing. The speed of this setup is much slower versus the other strategies discussed in this article; however, the difficulty reveals itself in the increased number of false moves, which are commonplace in the afternoon.
No more panic, no more doubts. Learn About TradingSim. These charts are just a sample of what happens far too often when it comes to afternoon trading. So, how do you find the stocks that will trend all day? I found a study on the web that looked at when a stock exceeded two standard deviations from its historical volume average, what would happen next.
The study concluded that it is better to be a buyer versus a seller. This volume spike will often lead to sharp reversals since the moves are unsustainable due to the imbalance of supply and demand. Trading counter to volume spikes can be profitable, but it requires enormous skill and mastery of volume analysis. These volume spikes can also be an opportunity for you as a trader to take a counter move position. You need to know what you are doing if you are going to trade volume spikes. The action is swift and you have to keep your stops tight, but if you time it right, you can capture some nice gains.
In the below example we will cover the stock Zulily. Notice how the stock never made a new high even though the volume and price action was present. This is a key sign that the bears are in control. The other setup with volume spikes are candlesticks with extremely long wicks.
In this scenario, stocks will often retest the low or high of the spike. You can take a position in the direction of the primary trend after the stock has had a nice retreat from the initial volume and price spike. You will notice how the stock had a significant gap down and then recovered nicely. Once the recovery began to flatline and the volume dried up, you will want to establish a short position.
The stock then recovered and flattened out, which was an excellent time to enter a short position. So, how do you know when a trade is failing? Simple answer — you can see the warning signs in the volume. Above is the chart of Amazon and you can see the stock attempted to break out in the first hour of trading. Notice how the volume on the breakout attempt was less than stellar. The above example of ESPR would drive me crazy 6 years ago.
Notice how the volume dries up as the stock attempts to make a lower low on the day. The key is to get out if the price action begins to chop sideways for many candles. When you sit in a stock hoping things will go your way, you are better off making a donation to charity. At least the money will go to a worthy cause.
The strategies discussed in this article can be used with any stock and on any time frame.
The most important point to remember is you want to see volume expand in the direction of your trade. Keep this in the back of your mind and you will do just fine.
So far in this article, we have covered how to apply volume analysis to identify trading opportunities day trading. The total volume of buy orders is measured against the total volume of sell orders, to reveal the net imbalance. The market participants behind each order are tracked, in a simlar way to the CoT Commitment of Traders report, to distinguish between commercial and speculative institutions, with speculators adding more weight to the final indicator display.
This is useful for volume spread analysis, in determining how much 'effort' was required to move the market. Order volumes are assessed to establish whether they are submitted to open new positons adding to open interest and strengthening a move or to close an old position reduce open interest and weaken a move. All volumes are compared against the average for the time period being assessed. The troubles come from the size of the Forex market.
This means that the Volumes indicator one can see on the MetaTrader 4 platform is actually only showing the volume of the broker who offers the trading platform. Such a thing is vital in interpreting the Volumes indicator, as it reflects almost perfectly the example from the start of this article: With one broker the Volumes indicator may show a green value for a specific candle, while on another broker it can show a red candle.
If the situation is so confused, what is to be done?
Can the Volumes indicator still be used? In this case, the trend is given by the candles that show the biggest volumes when compared with the other ones, or the candles that stand out from the crowd. The colour of these candles shows the direction of the general trend, namely if we need to buy or sell.
In order to filter all the Volumes candles, we need to do some historical research. This means that we need to go back in time and see where the majority of the spikes are forming and at what levels, and consider those levels for further interpretation. In the example above, it can be seen that the 30, level is one that is not pierced or broken by many candles. As a consequence, the traded volume above that level is worth considering, and all eyes should be on the colour of the candle that closes above the 30, level.
The OBV indicator, popularly known as on-balance volume, is a technical analysis indicator that relates volume flow to changes in a security's. The Forex volume indicator is a tool for FX traders to understand how the market is performing at a certain time. The number of trades happening.
That colour will give the direction of the trade. The way to trade with Volumes is to buy a green candle that closes about the 30, level in our example, or to sell a red candle that closes about that level as well.
All the other candles in between, or candles that close below our 30, level should be ignored, as they do not represent a proper trading signal. While the Volumes indicator is not representative of the whole Forex market, it shows the overall direction, and it is a nice approximation for the overall volume of the market. The real situation is rarely different, which is why Volumes is popular among Forex traders as well.
Such markets are the futures markets, or any other market where the traded volume can be seen for all the participants individual stocks, for example , and traders have developed many trading theories as a consequence. One of the most popular is the Volume Spread Analysis VSA theory, but here is not the place to discuss it, since it cannot have a full application on the Forex market. Future projects may involve this theory, which is based on the full volume traded at one moment in time on an underlying security.
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