Friday, November 20, 2009

Two Reasons I Like Volume Bars in Market Charts

Here is the day's trade in the ES futures, with each bar representing 50,000 contracts traded. I find this to be a useful perspective on markets for several reasons:

1) The bars draw faster in busy market periods and slower in low volume periods. Because I look for trade ideas by comparing successive bars on the chart, this has the natural effect of slowing me down when markets are thin and keeping me involved when markets are moving.

2) The bars separate the effects of volume on volatility. Because each bar represents the same volume traded, we can see markets gain and lose volatility through the day and readily identify when volatility is correlated with market direction. I'll post more on this topic later; it's quite important.

In general, I find it helpful to view charts in different ways over different time periods. Many times, a hypothesis will jump out from one perspective that could not be seen with a different view. The idea is to stay fertile and flexible in thinking and adapt to shifting market conditions.