Volume analysis is the technique of assessing the health of a trend, based on volume activity. Volume is one of the oldest day trading indicators in the market. I would dare to say the volume indicator is the most popular indicator used by market technicians as well. In addition to technicians, market fundamentalist also take notice to the number of shares traded for a given security.

How to Trade with Volume and Price | Volume Trading | Hawkeye

The tricky part is volume can provide conflicting messages for the same setup. Your ability to assess what the volume is telling you in conjunction with price action can be a deciding factor for your ability to turn a profit in the market. In this article, we will cover how to assess the volume indicator to help us determine the market's intentions across four common setups:. Traders will often look for breaks of support and resistance to enter positions.

For those fans of the Tradingsim blog, you know that I exclusively trade breakouts in the morning of each session. There are two key components to confirm a breakout: Can you tell me what happened to Netflix after the breakout of the early swing high? The interesting thing about the Netflix chart is that the stock never made a new high after the first 5-minute bar.

This is a prime example where a stock may have broken a high from a few weeks ago, but is unable to break the high for the current day. As day traders, you want to wait until the high of the day is broken with volume.

A key point for you is that every swing high does not need to exceed the previous swing high with more volume. I used to obsess over this and if I didn't see more volume I would walk away from the trade. While this charting example did not include a break of the daily high, when you look for stocks that are breaking highs, just look for heavy volume. Again, if we are within the margins, please do not beat yourself up over a few thousand shares. In a perfect world, the volume would expand on the breakout and allow you to eat most of the gains on the impulsive move higher.

Below is an example of this scenario. Let's test to see if you are picking up the concepts of breakouts with volume. Take a look at the below chart without scrolling too far and tell me if the stock will continue in the direction of the trend or reverse?

The answer to my question - you have no idea if the stock will have a valid breakout. From the chart, you could see that the stock had nice down volume and only one green candle before the breakdown took place.

This is where experience and money management come into play, because you have to take a chance on the trade. You would have known you were in a winner once you saw the volume pickup on the breakdown as illustrated in the chart and the price action began to break down with ease.

For those that follow the blog, you know that I like to enter the position on a new daily high with increased volume. You will need to place your stops slightly below the high to ensure you are not caught in a trap.

3 Ways to Improve a Strategy Using Real Trading Volume

This strategy works for both long and short positions. The key again, is looking for the expansion in volume prior to entering the trade. When a stock is moving higher in a stair-step approach, you will want to see volume increase on each successive high and decrease on each pullback. The underlying message is that there is more positive volume as the stock is moving higher, thus confirming the health of the trend.

This sort of confirmation in the volume activity is usually a result of a stock in an impulsive phase of a trend. The volume increase in the direction of the primary trend is something you will generally see as stocks progress throughout the day.

You will see the strong move into the 10 am time frame , a consolidation period and then acceleration from noon until the close. For those that follow the blog , you know that I do not trade in the afternoon; however, this doesn't mean you can't figure it out. As the stock moves in your favor, you should continuously monitor the volume activity to see if the move is in jeopardy of reversing. These charts are just a sample of what happens far too often when it comes to afternoon trading.

So, how do you find the stocks that will trend all day? After many years of trading, I can tell you I honestly don't know. Volume spikes are often the result of news driven events. This volume spike will often lead to sharp reversals, since the moves are unsustainable due to the imbalance of supply and demand.

Trading counter to volume spikes can be very profitable, but it requires enormous skill and mastery of volume analysis. These volume spikes can also be an opportunity for you as a trader to take a counter move position.

4 Simple Volume Trading Strategies - Tradingsim

You really need to know what you are doing if you are going to trade volume spikes. The action is swift and you have to keep your stops tight, but if you time it right, you can capture some nice gains. Let's walk through a few volume spike examples, which resulted in a reversal off the spike high or low.

What is Volume in Forex Trading? - Trading Heroes

Notice how the stock never made a new high even though the volume and price action was present. This is a key sign that the bears are in control. For this setup, you will want to focus on the following key items:.

The other setup with volume spikes are candlesticks with extremely long wicks. In this scenario, stocks will often times retest the low or high of the spike. Below is an example from a 5-minute chart of the stock Depomed, ticker DEPO. You will notice how the stock had a significant gap down and then recovered nicely. Once the recovery began to flat line and the volume dried up, you will want to establish a short position.

Let's take another look at a long wick setup. The below chart is of Frontier Communications, ticker FTR with a long wick down. The stock then recovered and went flat, which was an excellent time to enter a short position.

I would be remiss if I didn't touch on the topic of failed breakouts. As a day trader that specializes in early morning breakouts, I have my fair share of trades that just don't work out. So, how do you know when a trade is failing? Simple answer - you can see the warning signs in the volume. Above is the chart of Amazon and you can see the stock attempted to breakout in the first hour of trading. Notice how the volume on the breakout attempt was less than stellar.

As a trader, you shouldn't be surprised when the stock begins to float sideways with no real purpose. While this would have been a bad trade, because your money is idle, it's still much better than what I'm getting ready to show you next. The above example of ESPR would drive me crazy 6 years ago. Notice how the volume dries up as the stock attempts to make a lower low on the day. The key for you as a trader to get out is the price action begins to chop sideways for a number of candles.

When you sit in a stock hoping things will go your way, you could just make a donation to charity. At least the money will go to a worthy cause. The strategies discussed in this article can be used with any stock and on any time frame. Keep this in the back of your mind and you will do just fine.

To see how Tradingsim can help improve your bottom-line numbers, please visit our homepage. Learn to Day Trade 7x Faster Than Everyone Else Learn How. Free Trial Log In. Breakout of Swing High. NFLX - Flat for the day.

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