Is volume analysis useful in index futures?

[volpri]

Ok the imaginary big bull bar (opening bar) closing near its high on big volume. That indicates buying pressure. But now look at the opening bar as it really was, not imaginary. ROFLMAO! It is a big gap up bar on very high relative volume. But it closed near its low and closed at the same price it opened at. However, it opened gap up just over 10 points. But the entire range of bar 1 (excluding the gap up) was only about 2.5 points. And then we got BIG relative volume. So what does that tell me? What does it tell you? It tells me that a lot of buying and selling was going on. However, the gap is not filling. The bulls are winning otherwise the gap would begin to fill on such high volume.

Bar two still has fair relative volume. The next several bars form a tight range and do so on LESS volume. The next bar with large volume is bar 10. The bull BO bar (bar 10) was also highly indicative of buying pressure and it closed near it's high. Bars 11-18 (the first real PB) are made on smaller volume.

So, to the left we see a strong opening gap bar then a large bull bar (bar 10) so it is unlikely this PB will be deep. It could be but the context clearly says there is a lot of buying pressure. At bars 19 and 20 the PB ends and the trend up resumes so the PB was basically an 8 bar bull flag. The PB is gradual and made with small bars and also stays above the EMA. At this point probability favors a second leg up. I would be buying all the way down in the PB. In addition, the low PB never comes close to the BO point of the previous tight range that developed right after the open. All these factors indicate bullish or buying pressures. By bar 19 or 20 one should be long again with more contracts added during the PB or going long if one missed the first leg.

Bars 24 and 25 are both decent bear bars made on increasing volume. The market has been going up for 25 bars and all PB's are staying well above the EMA. This is by now an established Small PB bull trend. That means that buying on or adding on to an existing position on all PB's is probally a good tactic to use. The stopless can be raised to 2 or 3 ticks under each swing low as those lows are formed. This is likely going to be a grinding Small PB Bull Trend most of the day. And it was. And most of the day was made on non-consequential volume from bar 26 onward. This type of trending day was established early in the session.

The point I make is that we only had 4 or 5 significant volume bars most all day yet the trend was up from the get go. However, by looking at the volume bars its does help one to sort of stay on track with the where the transaction pressure is taking place.

That said, once you trade enough of these sort of senarios it really isn't necessary to even look at volume as one can pretty much ascertain, and I might add with quite some accuracy, that bars 1, 10, 24 and 25 were probally made on increasing volume. The one exception might be bar 1 as that could have been made on lower volume so I might would take a peak at volume on this one bar. When I see it to be large volume I then know a lot of buying pressure is there or it would have filled more of the opening gap. I prefer most of the time NOT to have volume bars on my chart because it just means another data point to consider before I make a decision to buy or sell. It is just adding another component that adds more complexity. I don't generally need to know the volume because I can usually look at a larger bar and just know that it was probally made on higher volume. Why complicate my decision making? The two MA's and PA are enough. I don't need any thing else.

But this in no way means volume is not a factor in the indexes. It is and it can be helpful in interpreting price action. As far as the individual volume in the many stocks or their sectors that make up an index I certainly would not try to see, or understand, which one, or which ones, are driving the ES. That would, for me, just complicate matters way beyond what I need to know. I just need to see the price of the basket and at times the activity recorded as the basket goes up or down in value. I do not need to know, nor even care to know, the "why" of the move. There is always a bullish AND a bearish interpretation of every news event. All I need to know is what price did and how it did it. I simply don't care about the why. Furthermore, I USUALLY only need to see "what" price did. An occasional look into "how" it did what it did is justifiable...in my books ...but EVEN THEN not something i wish to make a component of every trade.

Bottom line; volume can help with trading the indexes but once you get enough under your belt, trading PA, you probally won't even need to look at volume except on occasion, and just briefly, and usually just for clarification purposes.

Hope this helps. Bye

 

[Gotcha]

Thanks for the analysis volpri. I wanted to wait to reply until I could reply properly.

we see 3 bear bars with tails on top in that tight range. This at least for me indicates an impending probable BO south.

Excellent observation here. I would say though that at one point, you do have to start wondering why the bottom isn't breaking if it keeps getting pushed down. Yes it broke, but my first instinct isn't to show a breakdown, since as you say, most BO's fail.

Your analysis of the short and then long is very good, but one thing that is in the back of my head is that your'e waiting for these bars to close, so see how they close. You want to see the volume, you want to see if they close on a high or low, etc., and all of this is sucking away the opportunity of getting into the trade. I mean if you short that BO south, and wait to see what happens after the big down red bar, well, you're practically at your entry if not already a few ticks in a loss. Yes, after that big red bar, price stayed within the range of that red bar, but so often the reversal can happen so quickly, and if you wait for that next bar to close, price might already be above the red that you're wait to gauge the strength of.

Now when i see the close of green bull bar AFTER the big volume bar I am thinking big vol bar is a failed BO. The market is probally going back up to the top of the range. Why? Well the big vol bar had no follow through. The next bar is a bull bar. These two things tell me that some buyers have entered in otherwise the BO south would have had a good follow through bar. So, I am out of my short scalp and now I go long on that first bull bar after the big vol bar or I may wait for one more bar. It too was a bull bar. I'd then bet we are going back up towards the top of the range.

Another thing I notice is that so often, price will test the area where it broke out from. So yes, you have the big red down bar, then 2 inside green bars, but once it hit the high of that red bar, it could have rolled over right there and not gone back inside the range and ultimately testing the opening high.

This is followed by a double top. That is my exit point. Why would I exit at the DT? There are 4 reasons. 1) a double top formed. 2) Price is at the top of the previous range. 3) the channel is still down (context) 4) at the double top we just formed a wedge top i.e. 3 pushes up from his highlightED big bear bar. ALL that together is enough to make me jump ship and exit.

This is excellent. I'm not sure if I have the skills to predict when price will breakout or not, but you provide some good analysis for why you favor exiting at this double top rather than holding for a breakout and getting a few more ticks. Its interesting that later in the day when we tested the lows, around 11:10, we have a very severe break lower, which by that point was a double bottom at 2684.75. So really, when a high or low breaks I have no idea how to predict.

That can be traded this way without ever seeing the high volume on his first example.

Yes, getting back to the original discussion about volume, this is what I was looking for someone to comment on. I see @tommcginnis blew me off, which is fine, but clearly he made no mention of where his trades would go in relation to these volume bars, and hence how he actually uses the volume bars. Perhaps its too basic to say this, but a high volume bar should indicate either a move is happening, or the opposite. In this chart we are discussing, every high volume bar in fact produced a reversal of the direction of the high volume. But obviously, you can't go fading every high volume bar. Sometimes the high volume bar is stops being run, hence the large volume and no follow through, and sometimes the high volume bar is a move, that continues. But if you can't use a high volume bar as a filter which increases your win rate, then what is the point? This is after all the discussion at hand.

 

[Gotcha]

Oppps... when I posted my reply to you volpri I didn't even see all the additional material in this thread and all the charts. So perhaps my reply is useless.. will have to catch up with this thread now.

 

[Gotcha]

Short answer: "Absolutely."
As noted above, the (ES) futures mkt is largely a resource for hedging activity -- and in that way, plays out the hedgers' read of the market en mas. The volume transacted is helpful (and recorded! So it's in historical data.), but the volume on-the-bubble is also helpful: take your DOM ladder and sum the contracts showing on the bid as against the ask: whichever side is higher gives you the real-time guess of the hedgers as to which side they think the market is turning. (There's your counter-intuitive market tell for the day.)

I would tend to argue against this. I watch the DOM, and my platform shows me a running total of the 10 Bid and Ask levels. I think the algos and HFT firms very nicely fill in any imbalance. If they create an imbalance, it is usually very far away from the inside bid and ask, and it is also often times there to disguise the actual intent. I think its far too simplistic to say oh look, there are a total of 8000 contracts on the bid, and only 7000 on the ask, so it means price will go up because there are more buyers. I don't think, from my observations, that this will in any way help you with anything more than a 60% win rate. Most observations that are talked about hover around the 45%/55% usefulness rate.

 

[volpri]

While there are some parts of your analysis with which I agree, and some points that I would not choose to apply, I think it is outstanding that you went into such a detailed explanation of your step by step analysis. I have seen very few examples of such on ET, and I would think that those new to TA would find such explanations extremely informative. And I would think that starting some sort of educational TA thread would be welcomed by many. I have often thought of starting one myself but as slowly/poorly as I type what you posted above would take me a whole day to type.

Thanks for your kind words. Most of the time I seem to be scorned and laughed to oblivion for the trading ideas I share so it is refreshing to get my ego built back up a bit ..ROFL.

However, I horse around too much to be taken very seriousley. Nevertheless, I do enjoy sharing abit, once in a blue moon, things, from especially a strategic or tactical nature, that have impacted my trading. Trading is very personal. I guess because we are all snowflakes (i.e. Unique) ROFLMAO! Principles can be universal but the application of the principles vary depending on the context in which they are implemented and the implementers w.v. ..comfort level..risk aversion...etc ..ad nauseum.

I've thought about starting a thread but I may not be able to handle my detractors with my failing, fragile ego. I readily admit I am also guilty of "stirring the pot up" so to speak, so alot of it may simply be ME.

Maybe my occasional injection of something will end up being useful to someone and will suffice, at least for now. But who knows one bright cheery morn I may awaken in a real chirpy mood and start the "mother of all threads" ROFLMAO. NEOFLTAO (Now Everyones On the Floor Laughing their A$$ Off.)

 

[lcranston]

Volpri is to be congratulated for doing an excellent job of analyzing his chart in terms of candlesticks and candlestick volume. However, there is an alternative and perhaps simpler means of analysis looking only at price and volume (some might also find it to be easier).

Since this is an index futures contract, there are no gaps per se except for Friday close to Sunday open, and not always even then, and if one wants the "full picture", including the overnight activity can be helpful, as can be the context provided by the previous day's end-of-day activity.

In this case, an expansion of volpri's chart, there is a relatively minor "cascade" just after 1400 resulting in what appears to be a "selling climax". There is nothing to be done here since the downtrend is still intact. This is followed by a volume climax and a simultaneous test of the "selling climax" low (volume climaxes and selling climaxes need not be simultaneous and in fact often occur separately, the price climax serving as a wake-up call to those who've been asleep at the switch). To many price traders, this would be enough to warrant a long entry, but others would wait until the stride is broken. There is another test at about 1800 which doesn't go anywhere, but neither is the stride broken, so price could well continue its decline. In any case, there's no reason to do anything but watch.

The stride is broken at about 2000 and price drifts sideways. There is a very minor test of supply after 2100, but there is no selling interest (if there were, price would fall). Absent selling interest, price rallies then digests its gains until about 0800 (most traders have been asleep until now, but the prelude to the beginning of NY "real-time hours" provides important information).

Price then continues its upward bias, tests the top of the multi-hour range, and thrusts upward into the open (note that if one opens his window, what appears to be grind is actually a series of thrusts and retracements). The volume displays a surge of trading interest. That the interest comes chiefly from buyers is indicated by the fact that price rises (if it were coming from sellers, price would fall). Finally, after lunch, the stride is broken, which many would use as a signal to exit and stand aside for either a signal to short or a signal to participate in a continuation. As to further volume indications, there's no need for any. Price itself with its thrusts upward, shallow retracements, and unbroken stride suggests the continued move upward. Until the stride is broken, volume is largely irrelevant. However, at those junctures where buyers and sellers are each attempting to assert their dominance, volume -- i.e., trading interest and activity -- can provide an important component to one's trading decisions.

 

[Scataphagos]

1. Without a doubt. The importance of volume in making a proper analysis goes all the way back to The Dow Theory. In the case of manipulated stocks, it is of utmost importance.
2. No, no, and again,no!!
3.See no.2

It's been chewing on my subconscious since you posted this....

When there is a big spike in volume, is there not a big movement in price? Expressed another way.... is there ever huge volume without big/significant price movement?

If my premise is correct, then the volume spike which accompanies a turn in market direction is merely ancillary... saying the same thing as the price move. And as such, consideration of the volume is of no value.

I know... I disagreed with you yet again and got your knickers in a twist. But before you pop a vessel, give it some thought.

 

[polaris]

Volpri is to be congratulated for doing an excellent job of analyzing his chart in terms of candlesticks and candlestick volume. However, there is an alternative and perhaps simpler means of analysis looking only at price and volume (some might also find it to be easier).

Since this is an index futures contract, there are no gaps per se except for Friday close to Sunday open, and not always even then, and if one wants the "full picture", including the overnight activity can be helpful, as can be the context provided by the previous day's end-of-day activity.

In this case, an expansion of volpri's chart, there is a relatively minor "cascade" just after 1400 resulting in what appears to be a "selling climax". There is nothing to be done here since the downtrend is still intact. This is followed by a volume climax and a simultaneous test of the "selling climax" low (volume climaxes and selling climaxes need not be simultaneous and in fact often occur separately, the price climax serving as a wake-up call to those who've been asleep at the switch). To many price traders, this would be enough to warrant a long entry, but others would wait until the stride is broken. There is another test at about 1800 which doesn't go anywhere, but neither is the stride broken, so price could well continue its decline. In any case, there's no reason to do anything but watch.

The stride is broken at about 2000 and price drifts sideways. There is a very minor test of supply after 2100, but there is no selling interest (if there were, price would fall). Absent selling interest, price rallies then digests its gains until about 0800 (most traders have been asleep until now, but the prelude to the beginning of NY "real-time hours" provides important information).

Price then continues its upward bias, tests the top of the multi-hour range, and thrusts upward into the open (note that if one opens his window, what appears to be grind is actually a series of thrusts and retracements). The volume displays a surge of trading interest. That the interest comes chiefly from buyers is indicated by the fact that price rises (if it were coming from sellers, price would fall). Finally, after lunch, the stride is broken, which many would use as a signal to exit and stand aside for either a signal to short or a signal to participate in a continuation. As to further volume indications, there's no need for any. Price itself with its thrusts upward, shallow retracements, and unbroken stride suggests the continued move upward. Until the stride is broken, volume is largely irrelevant. However, at those junctures where buyers and sellers are each attempting to assert their dominance, volume -- i.e., trading interest and activity -- can provide an important component to one's trading decisions.

View attachment 180620

Between 03:00 and 09:00 you've put in a horizontal line at approx 2661, 'digestion' below and 'continuation' above.

This is also known as a cycle - accumulation, mark up, distribution, mark down.

 

[lcranston]

Between 03:00 and 09:00 you've put in a horizontal line at approx 2661, 'digestion' below and 'continuation' above.

This is also known as a cycle - accumulation, mark up, distribution, mark down.

Yes and no. Accumulation takes place on the way down. The surge in buying is part of what retards and eventually halts the decline. It can continue at the bottom if price moves sideways for an extended period rather than reverse. How long this period lasts will depend on the extent and severity of the decline, e.g., 2008-'09. Distribution, of course, takes place at or near tops, which is why they become tops. Unfortunately, accumulation and distribution are most often detected in hindsight. More frequently, these sometimes lengthy sideways "ranges" are a search on the parts of buyers and sellers for value (if buyers and sellers disagreed on value, price would not likely be moving sideways).

But none of this has anything to do with volume unless one wants to get into identifying accumulation and distribution via the volume/price patterns in a range, but that's a subject unto itself and may not be pertinent to the thread.

 

[volpri]

Thanks for the analysis volpri. I wanted to wait to reply until I could reply properly.


Excellent observation here. I would say though that at one point, you do have to start wondering why the bottom isn't breaking if it keeps getting pushed down. Yes it broke, but my first instinct isn't to show a breakdown, since as you say, most BO's fail.

Your analysis of the short and then long is very good, but one thing that is in the back of my head is that your'e waiting for these bars to close, so see how they close. You want to see the volume, you want to see if they close on a high or low, etc., and all of this is sucking away the opportunity of getting into the trade. I mean if you short that BO south, and wait to see what happens after the big down red bar, well, you're practically at your entry if not already a few ticks in a loss. Yes, after that big red bar, price stayed within the range of that red bar, but so often the reversal can happen so quickly, and if you wait for that next bar to close, price might already be above the red that you're wait to gauge the strength of.

First let me say I am observing buying/selling pressures all throughout a range to try and acsertain probable BO direction. So, I am forming a bias as the range is forming. That can be useful but also troublesome if the bias ends up being wrong. However, I am well aware that I will be wrong probally around 40% of the time. That is the context.

In this case the bottom isn't breaking down because the bulls keep pushing in back up. However selling pressure keeps pushing it back down. Bears want a BO south while bulls want a BO north. This will continue until one side wins and the other gives up at least momentarily. Each bar at the top of the range is a BO failure. Each bar at the bottom of the range is a BO failure. Each time the bulls and bears were attempting to make the market BO. So, these are all attempts at BO's that failed. That is why I say most BO's fail. It would probally be better to say most BO attempts fail. Sooner or later one will succeed. That is the nature of the market. Which will? Only PA can indicate that and give some measure of probability.

So, how many BO attempts were there in this tight range? Count them. At least 40. That is alot. So, the probability favors a successful BO occurring soon. The problem then becomes when that BO happens HOW FAR will it go? No one knows! However, again i will form a bias as to the distance or THE continuation of the BO depending on the actual PA of the individual bars of the BO. That is, after the BO happens I try to ascertain how far it will go or the probability of it continuing or just failing as the others and simply broadening the range. That is why the close of a bar is quite important to me.

So, as a range is forming I look at the range and attempt to ascertain which side appears to be stronger. In this tight sideways range I see far more bear bar sequences than bull bar sequences and more tails on tops of bars after their closing. In addition, most of the larger bars are bear bars. This means, at least for me, there is more ease of movement south. Nevertheless, I understand that the market can do and at times will do the exact opposite of what my bias is telling me. Therefore, i am also prepared to take an opposite stance if the BO is different than what I thought it would be. I pay close attention when the market surprises me. Many times that surprise will be followed by a great move in the unexpected direction. Some traders would say don't form bias's. I guess if that is what they want to do that is ok too. I don't use indicators other than a 20 ema and an 89 sma so 90% of my focus is on what is happening in the context and the individual bars. I am not saying it is the best way to trade but it is how I do it. On occasion I will look at volume but for the most part don't need to. I once heard a trader say "the best indicator for price is price itself." I heard that years ago and it has always stuck in my mind. I cannot get rid of it.

So in this case I am short on the close or shortly there after on that bear bar just before the HIGHLIGHTED big bear. Why? Well a tight range with 40 or more failed BO attempts and prior to my entry bar there were 9 bars with tails on top and the previous bar to my entry bar was an attempt by the bulls to arrest this selling pressure of those 9 bars with tails and this attempt by the bulls failed is obvious by the close of my entry bar. BECAUSE IT CLOSED WITH A BIG TAIL AND IT WAS A BEAR BAR. Hence, I would enter at the close of the bar before the highlighted bear bar because the prev bull bar was not successful in reversing this selling pressure of those 9 bars. My exit would be at the close of the highlighted bar. Why? Because since by the close of that highlighted bar the price was up off the low thus showing buying. So, I would probally scalp out. Because the price action indicated buying pressure by the close I would probally scalp out. However, if that close had been on the low of the highlighted bar i would not scalp out yet but hold for probable further decline and I would consider the BO to probally have two legs down. In a such a case i would most likely add on to my position in any pb. But it didn't close on the low so in my thinking best to scalp out.

I hope that explains my thinking. Again some of it is gray area because i pay close attention to "how" a bar is formed during the 5 minute process. That too influences my decision. However, in this case I am looking at something that has already happened without the benefit of seeing just how each 5 minute bar was formed. Did it make its high and low quickly? Grudgingly? Did hoover around the high of the bar most of the 5 minutes and just before the close makes it's low? Or did it make it's low first? Observations like these can only be made live as the bar is forming.