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Volume At Price – Where the Action Is!

Don Dawson

Volume in the Futures market is typically overlooked as a source of confirmation. Until the electronic markets were created, traders could not get volume figures from the Futures exchanges until the next trading day. Today, traders get real time cumulative volume figures on all the electronically traded Futures contracts. Volume is measured as one Futures contract for every buy and sell order that is matched and executed at an agreed upon price. Even though there were two parties to make the trade (one buyer and one seller), this still counts as one Futures contract.

Consistently profitable traders rely on more than one piece of information for making a trading decision; they will use tools that help them spot confluences at specific price levels. Once a trader locates these confluences, they will reduce the variables and enable them to make more informative and confident trading decisions. That is what consistently profitable traders want, confirmation to buy or sell. Confirmation does not mean you are late entering a trade, it just means you did a little more market analysis than your competition and came up with a trade with better probabilities of working.

The traditional use of volume was simply how many contracts traded during a particular period (5 min, 1 day, 1 week, etc). This information could tell us in general about the strength or weakness of the current trend, but did little to tell us at what price levels to anticipate future supply/demand levels. Using volume per duration, we can also see that there is always more volume in these candles at the opening and closing of each trading day, and during the mid-day, the volume tapers off. Many technicians like to see heavy volume during the impulse waves, and lighter volume on the corrective waves. Identifying volume like this can be rather subjective at times. Figure 1 will show a chart with the volume placed at the bottom of the chart. This is a 30 minute chart representing the actual number of contracts that traded during that particular 30 minutes. One drawback to this concept is that the majority of the volume could have been traded at the top or bottom of the candle at one or two price levels, and we would not know which level the high volume was at.

Chart Analysis  of S&P 500 Jun 2011Figure 1

There are two dynamic trading tools that traders use and they are Support/Resistance (Demand/Supply) levels and volume at price. Support/Resistance levels can also come from algorithmic calculations such as the popular Floor Trader Pivots.

The other way to look at volume is called volume at price (VAP). This refers to historical cumulative volume at each price level. Cumulative volume at price shows the total volume that has traded at each price for different time frames, such as the day, week or month. Comparing the cumulative volume at price of different time frames confirms volume distribution.

Figure 2 shows the intra-day volume at price levels being built in real time. Most charting packages have this feature and it can easily be enabled.

view VAP in real time or review historical data for market analysisFigure 2

During the trading day each time the market trades at a price, the VAP will keep track of the cumulative contracts traded at that price irrelevant to time (5, 15, 30 etc. minutes). We can view our VAP in real time or review historical data for market analysis. Volume at price shows you the high/low volume areas making it a historical data tool. Using historical data to gauge the reliability of future data is a common tool that has been used in many different forms for a number of years because, “History repeats itself.”

To be able to pinpoint the volume distribution at each price, a trader can get important signals for entry/exit points in the market. Since the market is an ongoing auction in search of value, volume becomes a driving force of market dynamics. By combining VAP and price levels on the chart, we are in essence putting value on these chart levels by showing strength or weakness. This value is identified by prices that attract high volume and prices that attract low volume. If there has been high volume at a certain price for the day, week and/or month, then when price revisits this price level, there is going to be a high probability that this high volume level is going to attract high volume again by becoming support or resistance. Large traders who placed trades at these levels from the previous visit will most likely be defending this level again.

Recently, I had the great pleasure of speaking with one of the founders of Chart-Ex, Lisa Erdmier. She and her husband Doug each have over 25 years experience in the Securities and Futures markets. Doug is a long-standing Chicago Board of Trade member and has traded in the T-Bond pits. I traded T-bonds myself from 1987 to 1998 before switching to electronic trading as an off the floor trader using the pits to fill my orders. During the pit trading era, everybody wanted to know “what was the floor doing – buying/selling?” While talking with Lisa, I had a chance to hear how the floor traders in the Bond pits used volume at price and its significance. I have always said, if the floor was watching something, then I want to watch it, too. Chart-Ex produces a “Free” VAP profile for each trading day and posts these results on the CMEGroup website, or the Chart-Ex com website. On the homepage, you will find a VAP profile with a drop down menu overhead for the previous day, week and month. Here you can select from many of the most liquid Futures contracts. This profile is updated at approximately 1:00 a.m. (CST), before the regular trading session opens so you can have these volume levels.

example of what a profile looks like

Figure 3 shows us an example of what a profile looks like.

I have found this data useful for swing and day trading. Because of the multiple time frames involved, I will compare all three profiles (daily, weekly and monthly). From my observation, I like to know where the current price action is trading in relation to any of the yellow lines you see displayed on the charts. These yellow lines are the price levels where the most volume traded at that price on either daily, weekly or monthly time frames. Another name for this high volume level is called a “point of control” which originated in the late 80’s by the creators of Market Profile. Point of control levels help determine support/resistance levels. If the market is trading under this level, it will become resistance once the market trades to it. If the market is trading over this level, then the market will find support. If the market trades through these point of controls, then their roles reverse support to resistance and resistance to support. Use these point of controls in conjunction with your support/resistance levels on your chart and you will find a higher probability trade.

“The miracle is this – the more we share, the more we have.” Leonard Nimoy

Follow your plan,

– Don Dawson

This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. Reprints allowed for private reading only, for all else, please obtain permission.