Some thoughts on volume taken in CONTEXT

[MC]

On typical charts/platforms red volume bars simply mean the close that day was lower than the prior days close. Green bars means close was higher than the prior days close. One may assume if the candle closed higher than the day before, making the volume bar green, there was more buying than selling. But that's often not the case. Look at volume and price action as a team not separate, and be sure you're using context. If volume is high and there is a downtrend in place there was probably more selling pressure than buying pressure typically. Often candles may be disguised to look bullish with an EOD scalper buying parade or dead cat bounce for example. There is no simple way other than screentime and extreme dedication to learn to read volume in context.

Volume bars in typical charts/platforms have no way to even attempt to measure directional delta. There are high end platforms that have indicators to measure tick delta at bid or ask but it's not cheap and not straight volume. Also if you think about it as a move takes place the ticks are not always what they seem. You can have big ticks at ask but it's selling into the strength at the ask. There is no indicator that will tell you what is true bid or ask tick, thats why trading is so hard. If there was a magical indicator it would be sold for $20k and everyone with that much to spare would be rich.

Volume + Price action + Context = Higher probability that you're reads will be correct.

Understanding Context = being aware of all the surrounding data and don't focus on 1 thing/indicator/timeframe. Context is knowing the background strength or weakness of the play at hand. Look at a weekly 3+ year chart as potential context to shape your trading bias on a daily timeframe as an example.

ALL indicators are derived from price action (and sometimes volume) and therefore lag. Be selective in how you guys use indicators and of course once you find a method that works for you...get them greenbacks!

[case]

Nice post.

I've often wondered what the meaning behind the green and red volume bars was.

[cire2222]

one thing i always keep in mind too is, volume is not always right. Many see big volume in a certain price range or at a given time and think that big buying volume signals a bottom and it's time to get in. The problem I have always had with that is you would be assuming that the big buyers are dead on correct. Now concidering that big money funds are happy just to beat the S&P500 I just can't count on them to be spot on very often.

Im not saying volume is useless but a simple 'big up day + big volume = market will continue to move higher' theory shouldn't be trusted.

[MC]

Originally Posted by cire2222

one thing i always keep in mind too is, volume is not always right. Many see big volume in a certain price range or at a given time and think that big buying volume signals a bottom and it's time to get in. The problem I have always had with that is you would be assuming that the big buyers are dead on correct. Now concidering that big money funds are happy just to beat the S&P500 I just can't count on them to be spot on very often.

Im not saying volume is useless but a simple 'big up day + big volume = market will continue to move higher' theory shouldn't be trusted.

No doubt. And on the other side of the coin...in the past I would look at big up days on big volume as hidden selling which is often true. But sometimes it's not, or it is but they aren't done selling the rally. You can really get your ass handed to you in a hurry stepping in front of a moving train! I now find low volume just as important if not more so.

[MC]

Volume is not cut and dry...there is no single way to look at volume. How could there be, it reflects 2 things...the buyer and sellers tug of war in a single axis without context. You MUST use context to try and feel or gauge the market participants current mindset and what they are doing with that volume. This is just one challenge and one reason why most fail using TA, they don't use context and take things in isolation. There are so many other ingredients in the recipe...someday I'll write a "cooking" book perhaps.

As long as a trend is in place and there is high volume on days that match the trend (ex: trend is down and big volume comes in below the previous days close), I read that as selling. Selling that was with the trend, so the trend has VERY high odds of continuing. There will be bounces that are tradeable but remember you're fighting the trend and don't be greedy when trading counter trend. "The trend is your friend" holds true most often.



On the LNG chart above, note how the candle I pointed out showed major buying pressure despite the volume bar being big and red. Red does not always equal selling that will act immediately. You could have rode a brief but violent dead cat bounce to the upside if you had a long signal. But also note how short lived that move was, and then read my comments in the last paragraph and my signature line again.

For much shorter term traders, the candle on the 12th had CLEAR buying pressure (absorption) on big volume, despite not being able to beat the prior close. Note the candle for proof of buying pressure...its red but hollow because it closed above the open of that day. In fact it closed near HOD after dropping dramatically low and bouncing hard (denoted by the wick). The wicks on candles are VERY telling...the wicks I could almost argue are even more important than the actual body of the candles. But again, keep things in context, a candle wick and even buying pressure means nothing by itself.

This brings me to a topic that is among the most complex to grasp. The market has many timeframes at work at any given time. You have scalpers, daytraders, short term swing traders, mid term swing traders, long term investors and everywhere beyond and between. I'll only touch on this briefly because I don't think it's something that can be verbalized effectively, you have to be very adept to grasp this and visualize it. This buying pressure in a downtrend as illustrated above is often short term traders getting in on a dead cat bounce. The market has to have some counter auctioning as it attempts to seek balance. The key here for a swing trader was there was large shareholders still selling, in this case to the very short term traders and probably some patient long term investors (smart money) as well. The point is as a swing trader go with the trend, as things move lower and volume keeps coming there is still selling pressure and vice versa on buying. You need to try and figure what trading timeframe is in control of the move and take trades along with traders sharing your timeframe/style.

So bottom line is don't focus on colors, focus on reaction to volume and context. And as long as you understand my signature line you should have a good starting point to study with. All that's left to do is to bend your mind around what context is and spot who is in control of the move...MUCH easier said than done. Study hard, put in lots of screentime and try not to make it harder than it has to be.

[MC]

Trendlines work the same as structure support in their use to see which side is winning the tug-o-war. A candle with a long wick bouncing off support with big volume could give insight that the bulls defended that level with vigor and probably ran stops to cause a spike they used to buy cheap. That same candle with no support causing the bounce would mean alot less in terms of a traders odds. This is why context is so important, the market 9/10 times won't reverse in the middle of nowhere.

Now small/tight candles at support/resistance shows rotation and balance which I find as important as wicky candles. The more volume, the more rotation came in at that level. Everyone loves BIG candles, but super small candles with big volume are at least as important. If you see a big volume on a tight balanced candle get ready cause bets have been placed by both sides and only 1 can win that move in the end. Generally it's a fade situation because if you're at support and bears can't drive it lower bulls stepped in to defend or vice versa at resistance.

Final thoughts for now...
BIG candles regardless of volume = momentum
Go with the flow till it retraces or balances/rotates.

Tight, high volume candles = balance nearing an end
Balance will give way to momentum soon, let the direction show itself then hop on the momo train.

[Fibman2005]

MC, could you comment on what today's price action and volume represent. Its hard to fathom that the DJIA fell over 500 points with less than 500,000 shares traded. My instinct says that today will feel like nothing compared to what looming in the future. Looking at a chart, how much worse is this going to get? Where do you see the Dow by Christmas?

--NVM, about the light volume today. I found out there was an error on stockcharts. It is now showing volume was over 2 billion. That seems more like it. Sorry for the confusion.