Wednesday, September 16, 2009

Reading Market Volume Flow

I recently wrote about learning order flow, which is the changing of bids and offers in the order book for a market. A bit different is watching what we might call volume flow: the flow of volume as it is transacted at certain prices and times. As readers know, I use Market Delta to track volume flow. To track order flow, one needs a depth of market display.

Above, I took a Market Delta chart that shows volume transacted at the market bid x volume transacted at the offer within the bar. If you click on the chart, you'll see key points numbered:

1) Note the increased volume on the break to new highs, as large traders participate in the move;

2) Note how the increased buying also brings in sellers, creating high volume at the bid *and* at the offer--a two-sided market. This often begins a process of short-term equilibrium and the start of a resistance area;

3) Note how volume dries up as we move down to prior resistance (resistance becomes support);

4) Note how, once again, higher prices find an influx of buyers, as large traders continue to participate in the rise;

5) Note how volume *keeps* expanding as we move higher: the higher prices are attracting buyers, not sellers. That helps keep the rally going.

I find the volume flow information within the bars to be particularly useful as a close-to-the-market gauge of trader sentiment.