How to Trade the Markets Understanding Volume
Volume is the only truly leading indicator. Professional traders use volume to determine investors’ interest in the market – it’s their way of understanding accumulation prior to up momentum and distribution prior to down momentum.
Hawkeye’s Volume Indicator gives you the ability to see professional buying, professional selling and no demand. This insight will give you the ability to trade with confidence.
This immensely powerful indicator performs over three hundred calculations per bar and provides the foundation stone of the Hawkeye suite of tools and methodology.
How Volume Trading Works
Trading using volume gives you the following:
- Volume confirms the strength of a trend or suggests its weakness.
- Rising volume indicates rising interest
- Falling volume suggests a decline in interest, or a statement of no interest.
- Extreme volume readings, i.e. climax volume, often highlights price reversals.
- Points where the market trades on high volume are the points of strong support and resistance.
- Breakouts and market spikes can be validated or ignored with the help of volume.
Volume Spread Analysis
In the 1930’s, stock market authority Richard Wyckoff took volume and analysed it until he found a predictive indicator which he called Wyckoff Volume Spread Analysis (VSA). Many of the world’s iconic traders went on to use Wyckoff’s Volume Spread Analysis. Jesse Livermore and JP Morgan were amongst the many wealthy traders that used VSA to great success. Since then it has been acknowledged that VSA is an extremely good leading indicator.
The software takes market volume, and then compares it to a number of other factors, such as each bar’s open and close, and the range of a specific number of preceding volume levels. It then combines this with the average true range of the market price to come up with one of the world’s only Volume Price Analysis indicators called the Hawkeye Volume indicator.
At the heart of the Hawkeye software is a complex algorithm which executes over 300 calculations per volume bar. It then displays instantly for you whether buying or selling volume is dominating the market. In other words, it doesn’t just tell you the volume, as with other trading software, but actually tells you whether the volume is buying or selling volume. If the volume is buying volume, the bar is green. If the volume is selling volume the bar is red, and when there is no market bias the bar is white.
The end result is one of the most accurate volume prediction indicators available. By taking account of the open and close of a bar and looking at the preceding volume bars it can sense the market mood and when combined with the other Hawkeye indicators, acts as a trigger for entry and exit into trades, which of course, makes your job simple.
High or Low?
Volume is the second most valuable item of data after the price itself. Large volume signifies that there are a large number of market participants involved in the price action, including financial institutions, who bring the highest turnover to the market. If the financial institutions are trading, it means they are interested in a price at certain level and they literally push the price up or down.
Low volume tells us that there are very few participants in the market, and that neither buyers nor sellers have any significant interest in the price. In this scenario, no financial institutions will be involved, and therefore any moves from individual traders will be weak.
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 decrease 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 is 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. 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 is 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.
The FOREX Volume Problem
Unfortunately forex volume cannot be measured as precisely as it is for equities, where every share traded equates to one on the volume bar. So selling 200 shares means 200 in selling volume. In stocks the number of shares traded is managed and reported by the central exchanges, such as the New York Stock Exchange. There are many exchanges around the world that keep track of every share bought and sold, so it is relatively easy to get a precise measure of share volumes being traded on a minute by minute basis. The same is true in the future markets.
However, in the spot FOREX market, there is no central exchange. So we cannot count how many contracts or indeed the size of contracts traded at any given time. Therefore to count volume in FOREX, it is the number of ticks, or changes in price, which is used, from which we derive our volume.
One tick measures 1 price change. As a tick moves up and down volume rises. When volume rises, it signals market activity with participants actively buying and selling currencies. So from this analysis we can get a relative measure of volume using tick data; but how do we know if it buying or selling volume?
This is where Hawkeye is unique. It uses complicated mathematical algorithms to establish (with an 80%+ accuracy) whether the tick volume is buying or selling volume. So now, for the first time, FOREX traders have the most important of all indicators available to them, VOLUME. The combination of the volume, VSA and trend indicators in Hawkeye make it the most accurate software tool available for FOREX traders. Is it any wonder that professional FOREX traders use Hawkeye?
Join them now, and become the FOREX trader you deserve to be.
Volume after all is the fuel that drives the market, both higher and lower. If there is no volume, then the market is unlikely to move far. It takes effort for a market to move, either higher or lower, and if there is no effort or volume, then the market will move into sideways consolidation, and only break out once volume increases significantly. This is the power of Volume Spread Analysis, which lies at the heart of the Hawkeye methodology.
Some of the greatest traders who have ever lived such as Jesse Livermore, W D Gann, Richard Wykoff and Richard Ney all used this technique as the cornerstone of their own trading philosophy. They understood the power of using volume and price action, and it allowed them to succeed, where so many traders had failed.
Now, at last, with the unique Hawkeye volume algorithm, we finally have the tools to truly see inside the market, and to trade with confidence, knowing that we are trading WITH the trend and the money flow, rather than against it.
Volume allows us to see, and rather than motoring through a sea fog, hoping to avoid an accident, the Hawkeye volume indicator gives us our own unique radar system to safely navigate in the forex markets.
It is the ultimate indicator, increasing exponentially our trading success, our confidence, and our analysis of risk on each and every trade. Without it, trading is a lottery. With it, you potentially have the winning ticket.
Just as with every other indicator, the Volume tool works across all the time frames from intraday time and tick based charts for scalping strategies, to longer term daily and weekly charts for trend traders.
The Hawkeye Volume Indicator works in all markets and can be used in all time frames for both tick and time charts — from longer term swing and trend trading on daily and weekly charts, down to fast scalping on an intra-day basis, using minute or tick charts.