Wednesday, February 19, 2014

Useful Trading Tools - Part Two: Volume

The first post in this series covered the NYSE TICK and how it offers insights into who is participating in markets.  In this post, we'll take a look at what can be learned from raw volume data.

The above chart covers today's trading in the late morning in the S&P 500 e-mini (ES) futures.  Notice how we were trading in a narrow range for much of the time with volume averaging about a couple thousand contracts traded per minute.  At 11:49 AM, we got a flow to the upside, with over 9400 contracts traded that minute.  NYSE TICK hit a high of 587 during that minute and we traded right back into the range subsequently.

What did that tell you?

Buyers came in and couldn't lift the market higher.  There was a relatively large buying flow, but it could not raise the TICK to statistically significant levels.  That tells us that the buying was not heavy across the full stock universe.  It was aggressive buying (significant volume), but it could not generate significant directional movement.  

Not a bad piece of market information.

Sure enough, at 11:58 AM--just nine minutes later--the ES contract prints over 9900 contracts during the minute and volatility expands, breaking us out of the range.  Moreover, NYSE TICK plunged to -797 and then to -997 the following minute.  That is significantly broad selling on significant market volume.  

In Market Profile terms, we have rejected value in the prior range and now are trending to establish a fresh, lower value area.  The fact that the move out of the range occurred with significant, broad market participation is an indication that directional participants have taken control of the market.  As you know from the remainder of the day session, they did indeed take control and we closed near the lows of the day.

It is common for traders to refer to the minute-by-minute movement of the market as "noise".  For those who understand the dynamics of price action, however, there can be important signals amidst the noise.  When we have low to average volume, we know that market makers are dominant and directional participants are relatively inactive.  When we have significantly expanded volume, we know that directional traders have taken the market reins and we can adjust expectations accordingly.  A meaningful shift in volume is often a nice tell for meaningful shifts in trading patterns.

Further Reading:  Relative Volume and Volatility


whiteout said...

Hi Brett
what do you think about tick volume ?
Do you think is a valid alternative to the trade volume ?
I am thinking about OTC markets, fx markets expecially.

Thank you

Nat Stewart said...

"It is common for traders to refer to the minute-by-minute movement of the market as "noise". For those who understand the dynamics of price action, however, there can be important signals amidst the noise."

That is a very good point. Chinese characters are "noise" to me, but of course that is do to my own limitations.

One thing I look at a great deal is net price change per unit of time (looking for outliers) relative to time of day norms. I am curious to what extent this overlaps w stuff like volume or tick readings. I am less familiar with tick, but with volume my guess would definitely be that it is related. U might have inspired a study on my part - I wonder if u have evaluated this.

SSK said...

Hello Brett, I love looking at volume also, especially on the same chart with the NYSE tick also. I like to look at volume around reference points that are of interest to. I love the volume delta indicator on Market Delta that gives you the delta of the time period of volume you’re looking at. I used to have both on my NYSE tick chart, there are many pictures from the old days in the archives with setups that show wonderful correlations between volume and or volume delta charts to support the points you make. I never did much work on the one minute timeframe, my work centered on the 5 minute, but the tenets are the same, a great tool. I started collecting data again for TAMTA’s VOLUME ANALYZER of the NYSE Composite figures for every 30 minute period, that helps too, in the sense that the program I created helps you to compare every 30 minute period to the periods any number of days back from any starting date thought out the year, and gives you the ability to do that in 5 day intervals.(in other words, every 5th day, you can input a starting day, and a look back period. That helps you in understanding the different correlations between groups of days in which the market is lackluster or rotating, and days that the markets are moving in a trending fashion. For each 30 minute period, it shows the max for that period, the min for the period, and the average for the period. Periods A through N starting at the 9:30 to 10am period eastern, which on my MP charts is the A period, though the N period which is 4-4:15 eastern, the final closing period. The real neat aspects are that you can choose any day, anywhere during the year and input the number of days back from that point, to get a clear comparison of what two similar markets look like that are separated over time, or to skip over the groups of days that would smooth out the average when comparing the current 30 minute periods to any current average of the days you choose, and or eliminating outlier days. This comes in handy when the data set becomes larger through the year, as the sheet has the ability to start anywhere in the year every 5th day. In other words, it is flexible. I have a link on TAMTA.NET if anyone wants to use it; it is call the TAMTA’s VOLUME ANALYZER. IT IS NOT THE SAME A THE TAMTA TRADING ANALYZER, which is use FOR PREFORMACE METRICS. At some point I will put a link to that also, along with instructional videos for both. I think it is cool, and have used it and gleamed insight as to what the avg, max and min for any period. That helps within the context of comparative analysis, to see if and how the tempo of the market matches the min, max or avg volume of other groups of days of the year your wishing to compare to.You have to input the data manually It though, but even if you’re not at the desk to put data in every 30 minutes, (which I like because if keeps you focused a bit more), it has the link to the NYSE EURONEXT market data that is refreshed every few seconds, so on the top of the 30 minute interval your considering, say the beginning B period starting at 10am eastern, you have the data for the A period from 9:30 to 10. Than at 10:30, subtracting the current figure from the previous figure gives you the number for the B period between 10 and 10:30am eastern, etc. That continues throughout the day, every 30 minutes. Since I am not at the desk all day, I simply use the voice recorder on a smart phone and check the figures out from the link of the EURONEXT and record the corresponding period with the newly published aggregate figure every 30 minutes. 5 seconds worth of recording for each 30 minute period is all it takes. Than later when I have time, I do the subtraction of one period from the previous one and input the data. Over time, you accumulate data for years, and is flexible in terms of comparison along the entire data set. Just one more piece of info that helps, Thanks for the example today! Best, SSK

John Grover said...

Though I'm interested in volume, I am always aware that for every seller there is a buyer and vice versa. I have the assumption that the markets are made up of the biggest traders, and that big volume on breakdowns for instance can just as easily be the weak hands selling to the strong hands in the context of the time frame. This conceptual framework allows me to deal with the false breakout phenomenon, and to reverse if it fails.

David Ayer said...

Have you stopped using MarketDelta? The (sort of) version of it I made for TradeStation showed the SPY 1 min bar ending at 11:50 with 175k Vol on upticks and 197k Vol on downticks with ave vol 205k. I love the separate readings - easier to interpret.

- David

marks said...

SSK, there is a Market Profile software program that does exactly what you are manually doing. It's called WindoTrader ( Based on 30 minutes periods is calculates the current volume against the average for prior 10 days of same period as well as delta and std dev for each period. You can set the # of days to average as well as include a threshold of volume to consider, like only trade over x number of contracts. Hope this helps. MS

SSK said...

Hello marks, thanks for the link, It was James Dalton that gave me the inspiration to right the program. I learned a lot from James a few yrs. back, he is a very good writer, also Don Jones from Cisco-futures, is real cool also. Don might have been involved with Gaussian theory a bit before James... I have mostly used Market Delta for charting when I was trading at the desk every day, right now I am taking care of a family member full time, so I am not day trading right now, but I am going to start the blog again, and do some daily analysis, probably starting in march. A rather simple approach, using an NYSE Tick chart, MP chart, and a basic weekly, daily, hourly and 5 minute chart, along with other interesting exercises outside of trading. James program looks good, I wouldn’t mind trying it. Thanks a million! Best, SSK