Wednesday, September 16, 2009

Using Volume Flow to Catch Short-Term Market Transitions

The recent post on reading volume flow illustrated breakout patterns that occur during the day. I find volume flow invaluable in tracking those transition, reversal trades as well.

Note how the net volume at bid vs. offer for each five-minute period in the ES futures (bottom histogram, above) dried up over the period covered by the blue arrow. That showed us that sellers were becoming less aggressive on subsequent attempts to take value lower. As the market moved higher, we saw an influx of buyers at 1061.25, supporting a nice pop higher.

In terms of execution, you want to buy on pullbacks, where the color inside the bar goes red, but where price cannot make a lower low. This is a good indication that sellers cannot push the market lower.