3 main principles when working with the volume
This letter is for those who are already familiar
with volumes and have traded using them, but found that the volume analysis has
its own "pitfalls".
If you are going to trade using volume analysis – then this information
will be extremely useful for you (it’ll help you to avoid financial losses and
disappointments).
One of my clients was not so lucky as you. He had no idea of what I'll tell
you now. He "poured a bucket of complaints and negative on me", though
he did not work with our software.
He asked us to find another program to analyze the delta – instead of
"that piece of **** that does not work at all". But I persuaded him, that
trading with analysis of only the Delta or order flow BID’n’ASK (in its various
interpretations) is not the best option.
As a result, he began to work on the levels of volumes and radically
changed the system. Now he is quite successful trader. What happened?
So, the story is simple. Michael works as an intraday trader. Usually, he
analyzed the situation on the market using technical analysis, and then looked
at the order flow and ratio between BID and ASK, then he made a decision about
entering. More often not right one.
When he saw delta (difference between BID and ASK) is negative – that meant
everyone’s selling, and he should also sell. And vice versa. Michael forgot
that in the trade there’re always a buyer and a seller. As well as, that the
delta shows the mood of the crowd, but it does not mean the sale or purchase is
directly. As an option: this can be a closing of position by the market order;
partial closing of position; opening of a short position; opening of a long
position, but by the limit order; and so on.
Besides, such indicator as Delta, BID, ASK and derived data (% of
Delta, ASK – BID and so on) are the calculated
data. Such as moving average, RSI, MACD
and so forth. They are calculated
according to the formulas. And are derived from a primary data. Primary
data is the time, the price and the volume of trade, which are publicly
broadcast by the exchange, on the fact of the transaction. So here's the first «main
principle»:
1.
Weight of
primary data (price, volume, time) is
always more important, than the secondary data: indicators BID & ASK, and
any other derivative indicators (MA, ROI, RSI etc.), which are calculated
according to the formulas.
Any other indicators, including BID & ASK indicators, are derived.
Moreover, different programs calculate them by different formulas. For example, in the program Volfix
there are 2 ways to display these data: Tick
Direct and Agressor. Therefore,
their interpretation can lead to different conclusions.
2. The data on volumes may be formed for different
periods. The volume of longer period is always more important than the smaller
one.
For example, you’re analyzing
the volumes of an hour and a day. And
see that there are several levels. One of which is formed during an hour, the
other one - during a day, and the third one - during a week. So that, the most
important level is the level of a week, then - the level of a day, and the
least important is the level of an hour.
3. The speed of volume accumulation is also very
important. It is always important to keep track of how quickly the volume was
stored. If a certain volume at some price was accumulated for 5 minutes, and
then the same volume at a different price was accumulated for 1 hour, it means
that the first volume will always be more important than the second one.
What does this mean? This means the aggression, with which buyers and
sellers were protecting the level. The more violent and aggressive the struggle
is - the stronger the effect of it. On the other hand, the accumulated volume
significantly extended in time may not give such a pulse.
If a talented pianist was given a trombone in his hands, he would not be
able to play on it. Would this mean that the trombone is a bad instrument?! No.
Just a pianist does not know how to play on it. But you do not become a good
pianist if you learn all the time how to play on trombone. Here the same. You
cannot study the market well, if you do not pay attention to one of the primary
elements - the volume.
The conclusion is: trading by volume analysis is an effective tool. But
only when you know how to use it properly.
Write me back what you think on that.
Have a good profits!
