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VOLUME Trading to find the BIG and Smart Traders - Forex Day Trading - YouTube
Channel: TRADING RUSH
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In my VWAP video, i talked about how and why
institutional brokers trade at the VWAP line.
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And how you can use that information to trade
when the big players are trading. Volume on
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a trading chart is pretty useless on its own.
But if you connect the volume with the price
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data, you will find some of the key levels
on a trading chart and can spot where the
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big players are trading. Individual traders
with their small number of shares, can't make
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a huge difference on a stock or Forex pair,
but if you buy and sell where the big and
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smart traders are trading, you will make more
profit, because price tends to make a big
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move when the institutional buyers enter the
market.
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But Before we learn how to find where the
big money is at, we will first have to understand
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how the volume actually works.
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Lets say, bill buys 200 shares at 10 dollars,
and bill the second sells 200 shares at 10
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dollars. Since bill bought 200 shares and
bill the second sold 200 shares at 10 dollars,
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the volume traded at 10 dollars is 200. It
is not 400. A lot of new traders think that
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the volume is 400, since 200 plus 200 equals
400.
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Purchasing few shares of a stock is very similar
to purchasing few pencils from a shop. And
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it is very similar to the math guy from the
textbooks. When the math guy pays 200 dollars
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to buy 200 watermelons, the sellers gives
him 200 watermelons. The volume traded here
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is 200, since the seller sold 200 watermelons,
and the buyer bought 200 watermelons at 200
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dollars.
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Like i said before, this kinda of volume data
on its own is pretty useless on a chart, unless
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you also take price data into consideration.
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Here's how to use the volume and price data
together on a trading chart.
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Number 1. When the price increases, and the
volume also increases, the price is considered
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to be bullish.
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Number 2. When the price increases, but the
volume decreases, the price is considered
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to be bullish, but only the small traders
are buying. Big players with their large amount
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of shares are not buying.
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Number 3. When the price decreases, but the
volume increases, the price is considered
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to be bearish.
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Number 4. But when the price is decreasing
and the volume is also decreasing, the price
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is considered to be in a downtrend, but only
the small traders are selling. Big players
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are not participating in that move.
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Now by increasing and decreasing volume, I'm
not聽 only talking about the volumes of individual
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candles, but also the volumes of all the neighboring
candles.
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A lot of new traders, will only look at the
volume of the candle that they are taking
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the trade on, and not the volumes of other
nearby candles.
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Sometimes, beginner traders are told that
they should pay attention to the volume when
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the enter trades. If you enter on a candle
and its volume rises, it is a good sign, as
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there might be other traders entering at the
same time. And if the volume does not rises,
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your trade entry might be wrong.
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This statement is kind of misleading. When
you enter trade on a candlestick pattern,
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there is no rule that the institutional buyers
and other traders will or should take positions
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by looking at the same candle. So the chances
of volume rising at the same time you take
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the position is highly unlikely. If many traders
are interested in buying at the same area
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as you are, you will see increase in volume
near your entry area, and not on your entry
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candle only.
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Since institutional buyers trade in very high
quantities, price tends to make sudden big
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moves, when the big players enter the market.
On smaller time frames, these sudden movements
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can easily take out your stop loss. But if
you spot the increase in volume at the right
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time, you should take this opportunity by
taking a position. If you get lucky, you will
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ride the whale.
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One of the situations where finding higher
volume is really helpful, is during the formation
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of the engulfing candlestick patterns.
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A bullish engulfing pattern is a candlestick
pattern that forms when the smaller than average
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red candle is followed by a large green candle.
This green candle is so big that it covers
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or engulfs the entire body of the previous
candle. Bullish engulfing pattern indicates
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a possibility of price moving higher.
A bearish engulfing pattern is just opposite
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of the bullish engulfing pattern.
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Not all engulfing patterns are worth trading.
To filter out false engulfing signals, you
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should take a look at the volume.
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Let me give you an example.
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Lets say, you are waiting for the price to
reach a support level. To make sure the support
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has a high chance of working, you look at
the volume.
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As the price is coming down to your support
area, you see the volume decreasing. When
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it touches your support area, a bullish engulfing
pattern is formed. An Engulfing pattern is
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a good sign as it indicates a reversal. But
this one is even better, because this bullish
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engulfing pattern has higher than average
volume on the green candle.
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This means that there is high buying demand
near the support area you drew. After this
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engulfing pattern, there is a high chance
that the price will move higher.
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In this example, you saw the decreasing volume
near the support area. But what if it had
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kept increasing even after touching your area?
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If you saw the price moving down towards your
support with higher volume. It indicates a
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bearish pressure. In simple words, there is
still a demand for selling near your support
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area. If this is the case, the probability
of your support area working and price reversing
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are very low.
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Volume can also help you identify the false
breakouts. If price is in a range for a while
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with a low volume, and you see a breakout
with an average volume, it indicates a possibility
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of it being a false breakout. But if a candle
breaks out of a range with higher than average
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volume, the chances of price moving further
in the breakout direction becomes higher.
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If you are trading using the volume, here
are some important points you should note.
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Number 1. Volume can be used to analyse the
market trend, and reversals and your support
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and resistance levels. Further more, volume
can also be used to make sure the pullbacks
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in a trend, are actual pullback and not reversals.
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In an uptrend, if price is moving higher,
and gives a pullback with lower volume, it's
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a sign that price can still move upwards.
But if the pullback has higher than average
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volume, it can indicate a start of a new downtrend.
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Number 2. Volume can also be used to find
the smart money and the dumb money. If price
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increases and volume increases, it a bullish
trend. If price increases, but volume decreases.
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It's a bullish trend, but there is no smart
money participating. If price is decreasing,
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but the volume is increasing, it's a bearish
trend. If the price is decreasing, but the
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volume is also decreasing, its a bearish trend
with dumb money. Big players are not participating
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in this move.
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Number 3. Avoid trading on low volume days
and take trades on higher volume days.
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Number 4. Volume can be a lot higher and price
movement can be more volatile on stocks during
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events or news releases. If you trade on smaller
time frames, you should keep an eye on these
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news releases that impact the volatility.
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Number 5. Volume is usually higher during
market聽openings and closing, and is low during
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lunch hours. If you are a beginner, you should
probably avoid trading during lunch hours
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and only聽trade when the market is trending
with a high volume.
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That's all. Now you know a little bit more
about volume in trading.
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