Lessons from the Pros


Ticked Off

I was recently teaching a Technical Analysis Strategies online course and the topic of volume came up in the class.  The students seemed surprised to learn that I do not look at volume on my charts while trading.  When asked why, I replied that volume is actually a lagging indicator.

Volume bars are shown as a histogram at the bottom of your chart and are built while the candle is being created.  If I want to see if the volume is higher than normal, I have to wait for the candle to finish before I can see it.  That makes it lagging.  If I want to view volume in real time, and make a judgment on whether it is high or low, I could view the speed of the movement on the time and sales column in my 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.

bwendell 20120724 - tick chart

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.

bwendell 20120724 - volume chart

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 timeframe.

DISCLAIMER 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.

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