Modules for Traders
Executing Technical Analysis
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Importance of Volume
The three-dimensional approach towards the market analysis is inclusive of a study of price, volume and open interest. Price holds a crucial value, but the work and open interest are equally pivotal for the confirmation of the price action on a chart. They offer a lead indication of an impending change of trend.
Volume defines the entire amount of trading activity or contracts that have been performed in a particular market for a single trading day. Trading during a market session is impacted directly by the volume during the day. If the chart shows a higher volume bar, it means that the trading activity was heavier for that particular day.
We can also understand it as a measure of pressure or intensity behind a price trend. The continuation or reversal of a trend is entirely dependent on the intensity of volume.
According to some technicians, it is believed that trends, whether up or down, appear in the volume figures before showing on the bar chart.
Volume Reports and Liquidity
Each of the volumes for a futures contract is reported with the total volume of the market one day after the trading day. However, estimates for the current day are posted simultaneously, for some the estimates are even posted every hour.
Volume is used to analyze the relation to liquidity on futures markets. If there is the greatest liquidity, that happens in the delivery month that is most active by volume, the traders of futures will receive the best execution fills. But as contracts move out from the second month, and traders move closer to their delivery month, it causes a natural surge in volume. In contrast to it, as the delivery date comes closer, volume declines. Looking at the volume of one month depicts only one - dimensional picture of market activity.
Looking at Total Volume: Tick Volume
To look further at more than one aspect, traders must analyze the volume of the aggregate of all the contracts. The total volume calculated levels out the increasing and decreasing pattern of participation based on the coming and going of individual delivery months.
If we talk in terms of the stock market, to garner an overall picture of the market, the volume for all stocks needs to be added together in a similar group, perhaps for a specific industry group. This streamlined over the periods when the volume of one particular contract was very low.
Since total volume is not immediately available on most of the days on the futures market, tick volume is used as the alternative. Tick Volume is determined as the number of price changes regardless of the volume during the day.
Tick volume relates to the actual volume because the prices change back and forth, as the market paces up during the day.
For Instance, a chart with 30 minutes of volume patterns, the number of ticks during that period is compared to the first 30 minutes of the day and can be recorded as the initial tick volume percentage. Now this percentage can be the outline to which one can relate the ticks of the volume for the day.
Volume Clusters on the Ends of the Trading Day
The morning orders are entirely based upon the reaction on the overnight news and events, and that is why traders enter the market early as the previous day's data that is calculated and analyzed after the close.
The day ends on an active note as the traders juggle for positions based on the price movements of the current day. The closing price is believed to be the most dependable value of the day.
Understanding Chart Patterns
The chart patterns depend on the volume of intraday. For Instance, a rounded bottom formation demonstrates low volume when traders take a break, usually in the late morning. However, individual issues differ from these patterns.
Interpreting Volume Using Open Interest
Open interest depicts the measurement of those participants in the future market who have a record of excellent trades. Open interest is the aggregated value of the total open positions in a market. It depicts the possible volume of that market. If the market witnesses a day with a low number of contracts but also a large open interest shows the trader that many participants will enter the market only when the price is right.
New buyers and sellers get attracted to the new interest in the market, and this leads to an increase in the open interest's value. More traders enter long positions when open interest surges that also lead to a quick rise in prices.
So, there must be a seller for every buyer. But the seller looks forward to holding the position for a few hours or day, to gain some profit from the varying price chart.
Position traders get assigned for the open interest. Still, at the same time, the trader looks forward to holding the position for a longer period to take advantage in case the prices keep on rising, as compared to the shorts which are usually forced out of their positions.
Let's understand the thumb rules to interpret changes in volume and open interest in the market:
- A trend is confirmed with a rising volume and rising open interest.
- Position liquidation can be determined with a rising volume and a falling open interest.
- Slow accumulation is depicted when volume falls, and open interests rise.
- A congestion phase is decided based on falling volume and falling open interest.
Volume and open interest are vital to depict the trading decision on the futures market, but these indicators again should be considered about extraneous market events. One must consider many aspects and dimensions to get the clearest picture of the market conditions.
A quick recap
- Trading Volume is a dependable aspect to have important insights into the stock price charts.
- Tick volume is considered as a better tool to measure the intraday volume for some futures contracts.
- Open interest is also a pivotal volume indicator to determine liquidity and the amount of money that has been risked by the traders in a specific underlying.