Daytrading- Big Picture and Volume Analysis

It is very easy to lose the “Forest for the Trees” when day trading. Part of the big picture is "Volume analysis," and part of the big picture is "Macro price analysis."

Since I am new to this forum, I wanted to mention a few things, and Ill try to be brief. I am a passionate trader just like many of you here. I have no idea if everyone here is an experienced trader, successful trader, just starting out, trying to learn new ideas, trying to hear about others approaches, etc.

In browsing the forums, my sense is this a place for traders to help traders, and that’s what Ill try to do here as well.

I am happy to answer any questions you may have, but I am here to (1) Hopefully mention some things that may be of interest to those who trade (2) Discuss any and all areas of trading (3) Continue to meet other interesting traders around the world. (4) Offer my little perspective on the ES market (5) Listen to other peoples perspectives as well.

Simply put, I am no different from most of you in that I have a passion for trading. I have been around long enough, and have seen much of what is out there, and quite frankly, I have made many of the mistakes that most traders unfortunately make at some point in their trading efforts. Also, the way I look to trade is by no means the only way to trade. There are so many styles and ways to do this, and no one style or approach is necessarily better or worse than any other.

In the end, it is my opinion, that you simply need some type of a solid plan that you have the confidence and discipline to follow on a consistent basis. The big picture, including macro price structure and volume analysis, can be very helpful
in setting up such a plan

So, Ill begin by sharing some thoughts on volume analysis that will hopefully be of some interest, and then Ill continue to share some ongoing thoughts on volume and big picture analysis in the current ES environment, and of course respond to any questions/comments along the way, and truly, my only hope is for everyone to do well in their trading, no matter what style, or approach they use.

 

Day trading and Volume – If you have never considered “Volume” in your day trading, maybe this information will provide something new for you to consider. It certainly can be applied in many different ways, and I continue to find it fascinating to explore.

We know that price vacillates all over the place, up and down, in the day timeframe. For those of you who have studied Market Profile the following will make a lot of sense to you. Assume that price action up and down, is nothing more than price moving up and down to fill “big orders” in the market.

In other words, forget about trends, support, resistance, or anything else other than the fact that all that is happening in the market is wherever the big orders are, price is going to go there. Conversely, if there are no big orders in a certain price area, price will move to another area to seek out where the big orders are.

With this perspective, you can see how lower prices are often not “sellers pushing price lower,” but rather price moving lower to find the big orders of patient buyers. Higher prices do not have to represent “buying pressure,” but instead can be the only course price can travel, after “all” buyers have patiently bought lower, and now the only participant looking to act are sellers up above. Price must go higher in response to this imbalance.

When you view price as nothing more than a vacillating entity looking to fill big orders, volume analysis can be the shining light with regard to price movement, showing where the big orders are, when the big orders are drying up, and where price is likely to go next, either to seek out new participants, or continue on its path to satisfy the big orders of existing participants.

For trading purposes, we start by watching for a volume extreme to develop, and then we watch to see what happens next. All price action accompanied by non-volume extremes is meaningless for this analysis.

When you set a good measure for up and down volume against price (i.e. volume ratio), you will be able to see where volume reaches an extreme, or reaches a level where big orders are.

When a volume extreme is reached, price will do one of three things: (1) Immediately move to an opposite extreme to fill opposite big orders (i.e.- all big buy orders filled low, go to fill big sell orders high), (2) Hang around this area and continue to fill remaining big orders with help from the anxiety of opposite big orders that aren’t being filled (i.e.- there are still more big buy orders to fill at low prices, price rises but never reaches the point where big sell orders are, so sellers cave in and sell lower, while buyers remain patient and buy lower), or (3) Hang around in this area and even though there less big orders to fill (i.e. - Most big buy orders are filled low, and price moves back down to this area with few big buy orders left to fill).

In case one, volume extreme vacillation means you are in a range with a single set of big orders above and below. Eventually all big orders dry up, price contracts, and price will have to move far out of this area to find new big order participants.

In case two, a volume extreme is the beginning to discovering many big orders. This condition is accompanied by opposite participants who are impatient to wait for price to come back to fill their big orders. Therefore, a volume extreme in one direction is followed by a non-extreme in the other direction, and price moves back in the original extreme and direction to fill more big orders, but in this case these big orders consist of both buyer and seller –one patient, the other anxious.

In case three, a volume extreme discovers a decent amount of big orders, and price continues to hang around in the area to fill these orders without a push from opposite side anxiety (Opposite side patiently waits for price to eventually come back to them). Therefore, as price continues to fill all big orders of one participant, volume slowly dries up signifying all big orders in this area are filled, and price must now move in an opposite direction to fill the orders for the patient participants waiting on the other side.

When you place all this understanding in the context of not predicting how this will unfold, but reacting to how it unfolds according to market structure, it can result in very powerful trading opportunities.

Here are a few examples:

1. If you see one volume extreme move to another volume extreme, know activity is starting to dry up in this area, and price is getting ready to move to a new area altogether. The trading implication is to stop taking new trades until you can recognize which patient big picture participant will win the tug of war waiting for price to come to it.
2. Strong volume extremes, followed by a lack of opposite volume extremes, means a continuation of current price direction is likely (big orders on both sides contributing to the continuation as one side is anxious, the other side patient). The trading implication is to look to enter new trades on pullbacks that aren’t experiencing volume extremes.
3.Strong volume extremes followed by price continuation unaccompanied by new volume extremes, means the big orders are drying up in this area, and the other side is remaining patient to wait for price to come to back to it. The trading implication means to either exit existing positions, or aggressively enter counter trend trades if other appropriate big picture conditions are in force.

I have attached a chart highlighting these three conditions

Conclusion – There are many ways to apply these volume conditions in an overall day trading approach. If you start watching what happens to price after volume extremes are reached, I think this may open up a whole new way for you to classify price behavior in the context of what is unfolding in the market according to prices main role- filling big orders in the market according to the balance or imbalance of big orders that exists or, according to whatever market participant (buyer or seller) is displaying the most patience or anxiety at the given moment.

 

Wow this explains everything. So if I wanted to drive the price down on say the ES, all I have to do is place an order for 1 billion contracts at 50 points lower then market, or wait even better, 1000 or 2000 points lower. As long as my order is bigger than everyone else, it'll get filled eventually right? All the big hedge funds, the mutual funds, and trading desks are all subconsciously seeking the biggest order in reality, all that technical analysis, fundamental indicators and hedging is just a cover for the real reason. And of course news is actually the result of big orders placed on the level 2, instead of the opposite. It all makes sense now.

Ehh im just joking, interesting viewpoint.

 

True,

I have no problem with the joking, but your example is not what Im saying at all. If you put in a billion contracts at 50 points lower, then at that moment you are a patient buyer in the market, and to the extent you remain patient or anxious with that order will in large part determine where price will go--- and thats the key point- the billion contract order will be part of the tug of war with patient sellers.

Therefore, if a news item, or something very fundemantal changes the condition of the market and price rises, you may not be as patient with your billion contracts below, and the patient sellers will be in control of the market and price will rise.

As your billion contract buy anxiety increases, along with the patient sellers above, price will continue to rise, until conditions change again.

And one more point....As I look at a chart where volume has dried up in an area, I will often say how now all the patient buyers are way below this area. Therefore, price will either go much higher or much lower under these conditions...

You can never predict nor ought to, but if the patient orders are now way below, price will either reach these orders way lower, or buyers will grow anxious if they cant get their price, and price will move way higher.

Volume analysis will help you see how these battles are developing and unfolding, and then I obviously havent discussed the technical analysis you rightfully mention to take of advantage of all of this with a good trading plan

 

Volume. Ha. Its supposed to provide a key to direction, but since the majority waits for it, it get exploited and used.

Electronic trading was supposed to allow for more volume and less volatility. Instead it leads to more market manipulation than ever.

 

Bdon

At some Im sure I will express my thoughts on how trading is nothing more than a probability game. Nothing is more important than price action, but volume viewed the right way, along with the bigger picture of price action, can in my opinion, definetly shift the odds in your favor with a good trading plan.

 

volume viewed the right way is a great indicator. i couldn't agree more. unfortunately some souless bastard at goldman didn't find that rewarding enough. Now we have more people trading volume (to get rebated) then trading for profit, which actually leads to an inefficient market. An orderly market needs profit and losses. But creating more volume for the sake of trading actually creates more volatility. Rebate trading is a joke and a disease that needs to be done away with. Especially rebating hidden liquidity, why reward someone for hiding?

 

THE BIG PICTURE

I always recommend zooming out your charts to get a feel for what is going on in the big picture – at least several timeframes beyond your trading timeframe.

Trades with the macro trend, that develop off key big picture highs and lows, or after logical pullback to swing points, or out of consolidation areas simply carry higher probabilities than other trade setups that fight these areas.

For instance, here is a big picture-minor and big picture-macro view of what is taking place in the ES market right now.

The macro trend has been down for almost a month now as denoted by the big picture trend line in place. I always like to step back to find the “normal” 45-degree trend line on a higher timeframe to gain perspective. I consider a trend line to be an “area” to watch closely. With a good day trading plan, the big picture changes slowly, and you don’t have to be overly precise as to an exact point that a trend line officially breaks

There are two early signs that a big picture macro trend may be changing. (1) New swing highs/ lows, (2) Breakout of consolidation areas.

Either of these two events don’t guarantee a new macro trend, but the change has to start somewhere, so if either of two events develop, you need to monitor until either they fail, or a new macro trend does in-fact develop.

If you look back on the chart over the last month (attached), you can see we had two breakouts from consolidation areas that in both cases brought price right to the macro trend line area.

In many cases a trend line area coincides with key swing points. Trend lines areas also often develop at prior breakout points.

When you see a breakout from consolidation one of two things will happen- (1) the breakout will hold, and a new macro trend will emerge (2) the breakout will not hold, and the macro trend continues.

During both recent consolidation breakouts, price couldn’t follow through beyond the trend line, the consolidation breakout point couldn’t hold, and the macro down trend resumed.

Again, I think it is always helpful to view a bigger picture from the timeframe you are trading to keep your trading in context.

Some of the big Picture price areas to watch for are (1) Key Bracket high lows (2) Pullback to prior swing points (3) Consolidation areas (4) Normal 40-50-60 percent retraces after a significant one directional moves.

In time, I will be able to point out ongoing examples of each of these.

But in the end, trading is a probability game, and Volume analysis and Macro price structure analysis can add a lot to identifying high probability trade sets ups with a good trading plan.

 

You bring up a very good point and one I havent fully considered before- there is no doubt there is tremendous volatility, and perhaps in large part for the reason you are pointing out.

The thing is, I find this volatility very helpful for the trading plan I implement, and whether the market is now more inefficient than before, it simply falls into the same category of volume showing you patience or anxiety on each side at any moment in time, and especially showing you the market moving from balance, to imbalance, to balance again and again, no matter what is causing this to happen.

 

agreed. the prevailing thought was more volume would bring more patience. But since the volume has come in the form of the impatient rebate trader, we actually see bigger whips. The stock, over time, usually still goes where it belongs

Adapt or die.