The knowledge that does not work
is sometimes useful than working one.
Thank you for being still with us. Now I will tell you what are the main mistakes traders make when analyzing the volume.
Mistake 1. Analysis of the volume only by the vertical histogram. It often surprises me. What can be seen on a vertical bar graph? Some say: “If the motion is real, it is supported by the volume.” In fact, it’s quite contrary. A large volume on a strong movement says, that the other side acts aggressively, and it, at least, slows it down, and, as a maximum, will deploy it. In any case, with large volumes during the trend, there is always a high probability of correction. If the price is «crawling or flying» without volume – it is rather the fact that the reverse side does not want to stop the price aggressively, and is waiting in the wings. Note the picture. In most cases, increased volume means a reversal.
Now look at another picture from the bottom. We see vertical volumes. We also see the volumes in clusters and can clearly understand where they accumulate, and with a high probability can predict a reversal (marked with yellow circle), as well as the continuation of the trend (marked with a square). Looking at the horizontal volumes, we can say at what price there was a maximum of purchases for a period (this price was acceptable for the most), as well as the trading range, which satisfied 70% of buyers and sellers.
Mistake 2. Have a clear criteria for comparing the volume. You shouldn’t compare the volumes during opening / closing the session, with those who are within days. Some of them (for example, closing) can be ignored in some cases, as there’s “autoconvergence”. Also for futures that are traded around the clock – it should be understood that the volumes of the main session will always be more significant. Also in different days – volumes may also be different. Often it makes sense to analyze the sharp flashes of volumes on local levels. And not just the total volume within a certain time-frame.
Mistake 3. Price is first and foremost. The volume does not figure at all. As the price can move the volume, and the volume can move the price. These two priority indicators should always be considered in tandem. Example: How do you think, what will be the price of watermelon in the following cases:
- In the market there’s a lot of sellers and only few buyers (season)
- In the market there’re few sellers and a lot of buyers (early season)
- There’re only 2 watermelon sellers and warehouse is not so big, but here come several buses with tourists.
- There’s a seller with large reserves of watermelons, but they begin to deteriorate and he wants to sell them quickly.
Every time the price will be different and it’s connected not just with supply and demand, in the classical economic form. The question is, what capacities certain participants have. The seller with a large margin, wishing to sell off goods, will greatly dump. And if you know that he sells his goods for a dollar, then you should not sell it for $ 5, until people buy up his watermelons. That’s why you also sell for dollar or don’t sell at all. Big seller presses you with his reserves. And if in the city there’re only few buyers – the price can never rise this season. It’s not that the demand for watermelons fell, and not that the offer is great. But, that the major player will always press. If you can figure out who’s the major player and at what price he is willing to sell / buy – this knowledge will allow you to earn a lot.
P.S. And if you know that tomorrow he will be selling at 50 cents – that’s called «insider information» J.
Mistake 4. I look at the Bid & Ask, know the delta between them – understand who is stronger in the market: “bulls” and “bears”. So think beginners, who are just connected platform. When someone sells, someone buys – the number of contracts sold is always equal to the bought ones. How, then, you can say that someone is dominant? The Bid & Ask parameters are calculated parameters. As well as other indicators. The exchange does not broadcast them. These indicators are calculated according to the formulas, and often different suppliers have their own formulas. Therefore you can see the different results of the same instrument.
Of course, this can be a good indicator in the right hands and can be used very effectively. But it is not as straightforward as you might think.
Mistake 5. Volumes show where the big players enter – I will go there. Volumes is an indicator of interest and the losses incurred by both sides. The higher the volume – the stronger the attack and defense. Volumes is a field, where you can see the fight. You can guess who will win in the course of the fight, but it is much safer to do this in the end. Reaction of the price to the volume with high probability proves who won and who lost. Therefore, we cannot know with 100% guarantee, although we can assume with high probability.