If you’ve been following along, we recently started our discussion of volume trading basics.
Today, we’re going to continue that discussion with volume and trends.
In the Hawkeye software, volume and trend is where the rubber meets the road.
Without the combination of these two variables, a trader doesn’t know the best times to enter the trade or exit for optimal profits.
When you have this information at your fingertips, you can see the precise moments when the market movers and institutional funds are moving into a trade, as well as when they take their money and run.
This makes your job as a trader…
Much More Profitable and…
Much Less Risky
Otherwise, like most other traders without Hawkeye in their toolbelt, you’ll be guessing…
To the detriment of your trade account balance and profit margin.
Volume and Trend
Volume helps us to determine the health of a trend.
An uptrend is strong and healthy if volume increases as price moves with the trend, and decreases when the market moves into a counter trend.
These are called correction periods or ‘pull backs.’
When prices are rising and volume is decreasing, it tells traders that a trend is unlikely to continue. Prices may still attempt to rise at a slower pace, and once sellers take control (which is shown by an increase in volume on a down bar), prices will fall.
A downtrend is strong and healthy if volume increases as prices move lower and decreases when the price begins to re-trace (pull back) upwards. When a market is falling and volume is decreasing, the downtrend is unlikely to continue. Prices will either continue to decrease, but at a slower pace or stop falling and start to rise.
Volume and Reversals
When volume spikes at certain price levels, professional traders know that this is a clear signal of increased interest being shown by traders at that price level. If there’s significant interest, as revealed by the volume bar, it means the level is an important one. This simple observation of volume allows traders to identify important support and resistance levels which are likely to play a significant role in the future.
Where volume spikes are extreme, larger than any historical spikes, and generally called a volume climax, traders should look for reversal clues from the price itself. Single volume spikes alone can often bring the market to an abrupt halt. These extreme volume spikes often occur during fundamental economic announcements which occur daily.
As we’ve seen with recent events such as the pandemic, the Presidential election and the announcement of multiple COVID-19 vaccines, news cycles can dramatically affect volume, and pricing as well. News can cause a spike in volume for a single day then disappear again.
Reversals, however, happen not over a single day but over a series of days. If higher than average volume stays in the market for several days a huge volume spike, a volume climax, will often signal a point of market reversal.
Volume and Breakouts
Volume can help to validate all kinds of breakouts. When the market is consolidating on low volume, an increase in volume can signify that a breakout is due. A breakout occurring on rising volume is a valid breakout, while a breakout with low volume is more likely to be false.
Why? Simply because the lack of volume signals a lack of interest from the market and traders.
Trend lines and other breakouts are validated or voided in exactly the same way. So, as you can see, volume is without question the most important and powerful indicator of all. It’s remarkably accurate at predicting future moves. When you start to incorporate Volume Price Analysis in association with a volume indicator, you then have an amazing trading tool at your disposal.
That tool is Hawkeye…
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