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!