Students often ask me why I do not use volume as a technical indicator on my charts. I actually do use it but in a different manner. Volume is actually a lagging indicator and most people use it incorrectly. They falsely believe that they need to buy or sell to enter positions where the charts exhibited high volume. Remember that the professionals are looking to buy or sell where there are leftover orders. If there was high volume then all orders were likely to have been filled and there would be none left over.
Volume bars are shown as a histogram at the bottom of your chart and are built while the candle is being created. If you want to see if the volume is higher than normal, you would have to wait for the candle to finish before you can see it. That makes volume a lagging indicator. If you want to view volume in real time and make a judgment on whether it is high or low, you could view the speed of the movement on the time and sales column in your trading platform. The problem is that you may not be able to read the number of shares traded on each print. A lot of 100 share prints streaming through does not have the same power as 1000+ share prints.
So, how can we see immediate volume and trading activity in our charts? What about using a tick chart? A tick chart differs from a normal candlestick chart in that it is not time-based but is based on number of trades or volume of trades. When you have a candlestick chart set for a five minute interval, you will have a new candle created every five minutes regardless of how many trades or shares were traded.
We can see supply and demand zones on this time-based chart.
However, when we switch the candles to a tick chart, we will be viewing the price based on market activity. The only way a new candle is created is when the minimum number of trades has been completed. You may notice that the time scale on the bottom is not even. Using a tick chart reveals where there is more trading activity and potentially volume that will form supply or demand zones in the future. Most of the time, you will also locate smaller, tighter supply and demand zones. This leads to smaller losses and larger gains.
To incorporate volume, we can set the candle charts to only create a new candle when the traded volume reaches a minimum number. This is also not a time based chart. The advantage of this volume candlestick is that when you see a large candle, it means prices moved much further on the same volume. This indicates a lack of supply or demand and offers excellent trading opportunities.
So there are ways of using volume and ticks to your benefit. The creation of the new candles shows you the speed or lack of it in the volume. You will have to experiment with your security to determine the correct setting for the timeframe you want to trade. There is no perfect setting for every security and every time frame.
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