How does a big volume bar produce a small price movement? V = Volume, L = Liquidity, P = price move High V + High L = Small P High V + Low L = Big P High V + #HFT only L = Flash Crash
A few points. My examples will be for futures which makes things easier given the one exchange, and certainly it gets much trickier for stocks given multiple exchanges and rules. First, the order book is full of people waiting to buy or sell at specific prices. Take some thing like the ES and you might have about 500 contracts offered to sell or bidding to buy at any one level. Multiply this by 10 levels above price, and 10 levels below price, and we can assume 5000 contracts are available that we can see at any one instant on the buy and sell side. If nothing changes, then someone buying or selling 500 should clear out one level, and then make the price go up or down one tick to the next level. If we assume that someone puts in a market order to buy or sell 1000 contracts, that is now 2 levels that will be instantly cleared. Obviously, given how quickly computers work, you might actually see more than 500 contracts trade at one price, even though there were only 500 offered at that price, because the second they were used up, someone added more at that level. Obviously if you want to buy a few thousand at a specific level, you don't want to advertise your willingness to buy because it will tip someone off and they may front run you. At the same time, sometimes big orders are sitting right there and are legit. When it comes to trading, things are usually 60/40, or 40/60, but never 80/20. So back to the example, when you do see a big order to through, but price hardly moves, if you were aware of how much was on offer at each level, and yet the amount that traded was much much more, then we have to assume that either, as the amount was used up, more was added, or, as has been explained to me, two firms will synchronize a big order to go through at a specific price so that just as it becomes available, its all traded. You would really need to look at the tape to see how this transaction happened. What may appear instantaneous could actually be very many transactions milliseconds apart that are multiple orders that just had the level refreshed. If price moves quite a bit, but on very little volume, then obviously, nobody was willing to trade at that price. If each level only has 100 on offer, and someone comes in with a market order for 500, then 5 levels will have to be cleared out in order to fill this order. It happens in the NQ all the time because the market tends to be quite thin in comparison to the ES.
In addition to works by P Steidlmeyer regarding volume profile, there is another piece by Bill williams called Mkt Facilitation Index (MFI) which shows the interplay bet volume and (Volume and range expansion and the 4 combinations of the 2 elements really does a good job in explaining price movements,etc. As an example.... range expansion on small volume + small volume= fake movement which I see on the floor of the softs around noon time when the locals just try to plumb for small stops above/below confident that there is no paper to get in their way.
I think this is a very interesting thread. A very good insight indeed! How the markets move is always the most fascinating thing for some traders like me.
Thank you! It is fascinating to me as well. Kinda like wondering how the gravitational or nuclear forces came to be.
In a similar vein as Tom DeMark writes about in one of his books on why price reverses, price tops initially not so much because sellers come in but a lack of additional new buyers and vice versa price bottoms initially not so much because buyers come in but a lack of additional new sellers. Price, volume, volatility all ebb and flow. Read and ride the wave.
i have some questions around Volume profile. A part that's unclear for we with the tool is that as is builds the histogram and tracks areas of value, how does it explain a rapid markup or markdown through areas of value at times where other times price gets absorbed? Although I understand the concept of shifting POC's but am still unclear of what comes before this happens. (According to this tool)
I have had similar observations as you did and here's what I found out. To your first question "why some big volume spike didn't affect price much", the answer is "block trade", which is a pre-negociated trade between two or more institutions and executed through a middle man (a broker). An example of such was the rumored report a few months back of Bill Ackman being contacted by Jefferies Group to buy Carl Icahn's stake in Herbalife (HLF). It was reported that Carl Icahn wanted to unload large numbers of his HLF shares, and one of his brokers (Jefferies Group) contacted Bill Ackman who Jefferies thought would be a potential buyer who's also financially capable. Were this deal actually executed, it would be done by Jefferies by selling and buying the blocks of shares simultaneously, at the prevailing market price, without actually putting the shares up to the bid/offer but simply report the Time and Sale after the fact. As such, you may see one or several large blocks of shares being reported on Time and Sale, and yet, it had little effect on the price movement. To your second question. Now the block trade is done, which didn't affect the price for the above reason, the stock is just back to trading on its usual order flows, and at that time of your obversation, very likely there were no or little "natural" buying and selling going on, thus a small "natural" order can move the price up and down a lot, especially if it's a thinly traded stock. Hope this makes sense.
MP and similar V-by-P tools are horizontal. They do not anticipate sentiment change. They offer a one dimensional measure of sentiment change, but only after the fact. That's the basic "problem" with horizontal tools. That said, for targets, naked POC's are very useful horizontals.