The Importance of Volume Bars Indicator
In the early days of
Technical Analysis all of the data from the Stock Market was not readily
available, in a format that could be hand-drawn on a chart. The earliest
chartists had to create their charts using either Point and Figure, Line, or
Bar Charts. Candlesticks were not introduced to the western markets until the 1990’s.
Data that was used on
the earliest charts was primarily Price and Time. Quantity aka Volume was
seldom included and it was fine to focus solely on Price, because there were
only a few exchanges and it was only rarely that off-exchange orders were
filled.
Nowadays there are
some 70+ Alternative Trading Systems ATS and Exchange venues. Since the bulk of
orders now filled off-exchange are in Dark Pool ATS venues, Volume has become a
critical indicator in order to fully understand the dynamics of Price. Adding
Volume and Volume leading indicators provide the missing data which is crucial
in the automated marketplace needed for using a Complete Data Set for
Stock Pick Analysis.
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High Frequency
Traders are here to stay and are now an integral part of the “market making”
computing community. As Market Makers, or Maker-Takers receiving a rebate from
the exchanges for providing liquidity, High Frequency Traders have become a major
contributor to maintaining the liquidity of exchange activity against the Dark
Pool venues which have for several years controlled the bulk of orders. Dark
Pools are often delayed orders during the day, OR the large lot orders will
fill before the market opens.
Using a Complete Data
Set for Stock Pick Analysis includes using all data
gathered after the market closes from every venue, since the Consolidated Data
differs considerably from End-of-Day EOD exchange Close Data which is the
closing data of the day.
Volume Bars provide
considerable information beyond the “green is an up day, and red is a down day”
in the basic courses for beginners. The length of the Volume Bar matters. Using
a Moving Average or other subordinate indicator can help determine the average
of Volume, which provides an easy visual reference.
NEVER truncate your
Volume indicator. This is a mistake because the bars represent the total number
of shares traded that day, and will provide many “indications” required to
understand who controls Price on that day.
The chart example
below has Volume to the upside that is above average, during the final low and
bottoming phase of this Downtrend.
The next day the stock moves with a huge point gain, a nice entry was set up the day before and since the stock ran rather than gapping, this was a good easy Swing Trade. The Volume Bars clearly indicated the bottom had accumulation intermittently, and the compression of Price before the High Frequency Traders also indicated a potential for a High Frequency Trader run.
HFTs leave the
easiest of all footprints to recognize. Most of the time these runs last less
than one minute as the High Frequency Traders trade on the millisecond scale,
moving 1000-3000 trade orders per second.
After
the big High Frequency Trader run, the price action is all Smaller Funds and
Retail Traders chasing after them. The gains are smaller, due to the use of
Volume Weighted Average Price orders and Limit Orders. Volume declines from its
extreme High Frequency Trader highs but is still very high, as Professional
Traders are also taking profits from the run up out of the bottom. Because
smaller lots have less buying power, the run exhausts quickly and profit taking
takes over.
As Volume falls below
its average the stock is forced into a sideways consolidation pattern, as
profit takers sell and late Smaller Lot Buyers inadvertently using MACD are buying into the sideways pattern.
A surge of Volume
initiates new Professional Trader activity. Then the stock runs up to test the
bottom completion resistance level, with surges of Volume.
Summary
Volume Bars have far
more information within their range fluctuations that most traders realize.
Using a Complete Data Set for Stock Pick Analysis means learning to read
Volume Bars accurately which takes practice. However the time is well spent as
it will help Technical Traders enter a stock earlier, rather than too late for
best profits.
TechniTrader is
"The Gold Standard in Stock Market Education." Go to the TechniTrader
Learning Center and watch a wide variety of webinars, to experience for
yourself the excellence of TechniTrader education.
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Trade
Wisely,
Martha
Stokes CMT
TechniTrader technical analysis using StockCharts charts, courtesy of StockCharts.com
Instructor & Developer of TechniTrader Stock and Option Courses
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