Volume is the Secret to Futures Trading
December 28th, 2008
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John Gleason asked:
Volume is the indicator which technical analysts constantly look at to determine whether or not a move in the markets, a single stock or sector has conviction. It may also be the easiest of all indicators to understand. Add the number of shares/contracts traded in a given period, and you have the answer. It requires no weightings or exotic mathematical formulas. It simply indicates enthusiasm or lack thereof for a financial instrument and it has nothing to do with the price of the instrument. Mastering the volume indicators can be the ‘keys to the city’ that traders look for because volume precedes price.
To confirm a market turnaround or trend reversal, the technical analyst must determine whether or not the measurements of price and volume momentum agree with each other. If they do not, it is a sure indicator of weakness in the trend, and thus a trend reversal may be well on the horizon. If we look at volume from the standpoint of momentum we see a recognizable level of buying and selling activity. Because volume is paramount I use five different volume indicators in my charts, as follows;
Up/Down Volume Indicator
Volume Moving Average – (VOLMA)
Volume Rate of Change – (VROC)
Volume Oscillator – (VO)
On Balance Volume Oscillator – (OBV)
Up/Down Volume Indicator
This indicator merely shows the total number of contracts traded, plotted in green or red indicating whether the up or down volume was greater on that particular bar.
Volume Moving Average
The VOLMA normally plots/overlays the Volume Indicator, showing the average volume over the last number of bars/periods. The default is typically 20 periods; however, you can adjust the input values depending upon the time frame in use.
Volume Rate of Change
This indicator shows whether or not a volume trend is developing in either an up or down direction. This indicator also provides insight into the strength or weakness of a Price trend. THE VOLMA plots the most recent bars volume and compares it to the average volume of the previous 14 bars on a 5-minute chart (35 bars on a 2 minute chart). The results are plotted as a value fluctuating above or below the zero line.
A positive value suggests enough market support to continue to drive prices actively in the direction of the trend (whether it be up or down). While a negative reading below the zero line suggests that there is lack of support to continue the existing trend and prices may begin to become stagnant or reverse.
Volume Oscillator
The VO uses the difference between two moving averages of volume to determine if the trend is increasing or decreasing. The fast volume moving average is usually over a period of 14 bars/periods. The slow volume moving average is usually 28 bars/periods. On a regular basis, analysts argue over whether or not the lengths of these time periods are appropriate. Some say that 14 and 28 are too conservative while others argue these numbers are not conservative enough. Many short-term traders use 5-10 (fast MA) and 20 (slow MA) as input values.
The histogram, like an oscillator, fluctuates above and below a zero line. Volume can provide insight into the strength or weakness of a price trend. This indicator plots positive values above the zero line and negative values below the line. A positive value suggests there is enough market support to continue driving price activity in the direction of the current trend (up or down). A negative value suggests there is a lack of support and that prices may begin to become stagnant or reverse. A value above zero indicates that the shorter term volume moving average has risen above the longer term volume moving average. This indicates that the shorter term trend is higher than the longer term trend.
A rising Volume Oscillator usually suggests a strengthening of the Trend while a falling Volume Oscillator usually suggests a weakening of the trend. But that is not always true. Rising prices with increased short-term volume is bullish as is falling prices with decreased volume. Falling prices with increased volume or rising prices with decreased volume indicate market weakness.
The Volume Oscillator confirms price movement. When volume is low but gains and losses are big, the professionals are most likely getting overly excited about a possible turn in market direction. That’s because many have been taught that without strong volume a market move is not valid. Here we look at how to interpret volume and the principles behind doing so.
Significance. If a market is rallying, the volume oscillator should rise. When the issue becomes overbought, the oscillator will reverse its direction. If the market is declining or moving in a horizontal direction, the volume should contract. Always keep in mind that we are measuring changes in volume, and volume expands during a sell-off. It is important to note that an increasing price together with declining volume is always, without exception, bearish. When the market is at the top, one would therefore see an oversold volume chart. Another important fact is that rising volume together with declining prices is also bearish.
On Balance Volume
The OBV plots as a running total of volume. It adds to the running total, the volume of each bar with a higher close than the previous bar and subtracts from the running total the volume of each bar with a lower close than the previous bar. It shows if volume is flowing into or out of a security. When the security closes higher than the previous close, all of the period’s volume is considered up-volume. When the security closes lower than the previous close, all of the period’s volume is considered down-volume.
The basic assumption, regarding OBV analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV. When the public then moves into the security, both the security and the OBV will surge ahead.
If the security’s price movement precedes OBV movement, a “non-confirmation” has occurred. Non-confirmations can occur at bull market tops (when the security rises without, or before, the OBV) or at bear market bottoms (when the security falls without, or before, the OBV).
The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the OBV is in a falling trend when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend.
The relative value or trend direction is more important than the numeric value. For example higher prices with light volume will cause the OBV to rise slowly indicating a lack of conviction. A rising OBV suggests a strengthening of the trend (up or down). A falling OBV suggests a weakening of the trend (up or down)
Once a trend is established, it remains in force until it is broken. There are two ways in which the OBV trend can be broken. The first occurs when the trend changes from a rising trend to a falling trend, or from a falling trend to a rising trend.
The second way the OBV trend can be broken is if the trend changes to a doubtful trend and remains doubtful for more than three days. Thus, if the security changes from a rising trend to a doubtful trend and remains doubtful for only two days before changing back to a rising trend, the OBV is considered to have always been in a rising trend.
When the OBV changes to a rising or falling trend, a “breakout” has occurred. Since OBV breakouts normally precede price breakouts, investors should buy long on OBV upside breakouts. Likewise, investors should sell short when the OBV makes a downside breakout. Positions should be held until the trend changes (as explained in the preceding paragraph). This method of analyzing On Balance Volume is designed for trading short-term cycles. Investors must act quickly and decisively if they wish to profit from short-term OBV analysis.
CANGEMI
Volume is the indicator which technical analysts constantly look at to determine whether or not a move in the markets, a single stock or sector has conviction. It may also be the easiest of all indicators to understand. Add the number of shares/contracts traded in a given period, and you have the answer. It requires no weightings or exotic mathematical formulas. It simply indicates enthusiasm or lack thereof for a financial instrument and it has nothing to do with the price of the instrument. Mastering the volume indicators can be the ‘keys to the city’ that traders look for because volume precedes price.
To confirm a market turnaround or trend reversal, the technical analyst must determine whether or not the measurements of price and volume momentum agree with each other. If they do not, it is a sure indicator of weakness in the trend, and thus a trend reversal may be well on the horizon. If we look at volume from the standpoint of momentum we see a recognizable level of buying and selling activity. Because volume is paramount I use five different volume indicators in my charts, as follows;
Up/Down Volume Indicator
Volume Moving Average – (VOLMA)
Volume Rate of Change – (VROC)
Volume Oscillator – (VO)
On Balance Volume Oscillator – (OBV)
Up/Down Volume Indicator
This indicator merely shows the total number of contracts traded, plotted in green or red indicating whether the up or down volume was greater on that particular bar.
Volume Moving Average
The VOLMA normally plots/overlays the Volume Indicator, showing the average volume over the last number of bars/periods. The default is typically 20 periods; however, you can adjust the input values depending upon the time frame in use.
Volume Rate of Change
This indicator shows whether or not a volume trend is developing in either an up or down direction. This indicator also provides insight into the strength or weakness of a Price trend. THE VOLMA plots the most recent bars volume and compares it to the average volume of the previous 14 bars on a 5-minute chart (35 bars on a 2 minute chart). The results are plotted as a value fluctuating above or below the zero line.
A positive value suggests enough market support to continue to drive prices actively in the direction of the trend (whether it be up or down). While a negative reading below the zero line suggests that there is lack of support to continue the existing trend and prices may begin to become stagnant or reverse.
Volume Oscillator
The VO uses the difference between two moving averages of volume to determine if the trend is increasing or decreasing. The fast volume moving average is usually over a period of 14 bars/periods. The slow volume moving average is usually 28 bars/periods. On a regular basis, analysts argue over whether or not the lengths of these time periods are appropriate. Some say that 14 and 28 are too conservative while others argue these numbers are not conservative enough. Many short-term traders use 5-10 (fast MA) and 20 (slow MA) as input values.
The histogram, like an oscillator, fluctuates above and below a zero line. Volume can provide insight into the strength or weakness of a price trend. This indicator plots positive values above the zero line and negative values below the line. A positive value suggests there is enough market support to continue driving price activity in the direction of the current trend (up or down). A negative value suggests there is a lack of support and that prices may begin to become stagnant or reverse. A value above zero indicates that the shorter term volume moving average has risen above the longer term volume moving average. This indicates that the shorter term trend is higher than the longer term trend.
A rising Volume Oscillator usually suggests a strengthening of the Trend while a falling Volume Oscillator usually suggests a weakening of the trend. But that is not always true. Rising prices with increased short-term volume is bullish as is falling prices with decreased volume. Falling prices with increased volume or rising prices with decreased volume indicate market weakness.
The Volume Oscillator confirms price movement. When volume is low but gains and losses are big, the professionals are most likely getting overly excited about a possible turn in market direction. That’s because many have been taught that without strong volume a market move is not valid. Here we look at how to interpret volume and the principles behind doing so.
Significance. If a market is rallying, the volume oscillator should rise. When the issue becomes overbought, the oscillator will reverse its direction. If the market is declining or moving in a horizontal direction, the volume should contract. Always keep in mind that we are measuring changes in volume, and volume expands during a sell-off. It is important to note that an increasing price together with declining volume is always, without exception, bearish. When the market is at the top, one would therefore see an oversold volume chart. Another important fact is that rising volume together with declining prices is also bearish.
On Balance Volume
The OBV plots as a running total of volume. It adds to the running total, the volume of each bar with a higher close than the previous bar and subtracts from the running total the volume of each bar with a lower close than the previous bar. It shows if volume is flowing into or out of a security. When the security closes higher than the previous close, all of the period’s volume is considered up-volume. When the security closes lower than the previous close, all of the period’s volume is considered down-volume.
The basic assumption, regarding OBV analysis, is that OBV changes precede price changes. The theory is that smart money can be seen flowing into the security by a rising OBV. When the public then moves into the security, both the security and the OBV will surge ahead.
If the security’s price movement precedes OBV movement, a “non-confirmation” has occurred. Non-confirmations can occur at bull market tops (when the security rises without, or before, the OBV) or at bear market bottoms (when the security falls without, or before, the OBV).
The OBV is in a rising trend when each new peak is higher than the previous peak and each new trough is higher than the previous trough. Likewise, the OBV is in a falling trend when each successive peak is lower than the previous peak and each successive trough is lower than the previous trough. When the OBV is moving sideways and is not making successive highs and lows, it is in a doubtful trend.
The relative value or trend direction is more important than the numeric value. For example higher prices with light volume will cause the OBV to rise slowly indicating a lack of conviction. A rising OBV suggests a strengthening of the trend (up or down). A falling OBV suggests a weakening of the trend (up or down)
Once a trend is established, it remains in force until it is broken. There are two ways in which the OBV trend can be broken. The first occurs when the trend changes from a rising trend to a falling trend, or from a falling trend to a rising trend.
The second way the OBV trend can be broken is if the trend changes to a doubtful trend and remains doubtful for more than three days. Thus, if the security changes from a rising trend to a doubtful trend and remains doubtful for only two days before changing back to a rising trend, the OBV is considered to have always been in a rising trend.
When the OBV changes to a rising or falling trend, a “breakout” has occurred. Since OBV breakouts normally precede price breakouts, investors should buy long on OBV upside breakouts. Likewise, investors should sell short when the OBV makes a downside breakout. Positions should be held until the trend changes (as explained in the preceding paragraph). This method of analyzing On Balance Volume is designed for trading short-term cycles. Investors must act quickly and decisively if they wish to profit from short-term OBV analysis.
CANGEMI
