Article / 10 August 2016 at 13:00 GMT

Pump up the volume

Hypothesis Testing
United Kingdom
  • Asset price charts reflect both mass psychology, planners' intent
  • Volume moves can attract position traders as well as scalpers
  • Careful technical analysis will reveal the best approach

By fxtime*

I am not going to describe classic volume curves and the like that are evidenced in many books, as we all know these scenarios and strategies. Perhaps one area that might be of interest however, is the topic of when to scalp or position-trade a market using volume as a reference value?

Consider a walk through your local shopping mall at peak times... Here, you have to dodge around people stopping to chat, evade push chairs, and sidestep overladen shoppers while generally working your way around the usual melee of random pedestrians seeking different shops from different routes. 

Typically you will find crowds to work your way around, then (bizarrely) an open void that you can quickly move through. uninterrupted. What you are witnessing is the same as what you find in major liquid markets or forex markets...

Random walk theorem suggests that we all walk – or more to the point, can walk – in any direction that we wish. It is the application of our surroundings and physical conditions that will skew our random movement. A large fountain positioned in the middle of a shopping mall is enough of a physical influence to ensure pedestrians are forced to move ''randomly off course'' around the obstacle to prevent being soaked, but also it forces us to pass a greater shop window frontage. 

Thus we aren't totally random, but rather move at the behest of planners seeking to direct traffic nearer to shop facades.

At the mall
One can learn a lot about trading at the mall. Photo: iStock

Shopping malls also have open central areas for places such as fast-food venues that make you stay longer and consider your next action. Whether you continue shopping or simply leave the mall after you eat, you will make a decision and your action will be decisive. 

So let's get back to markets in general. A generalised market where you are weaving your way through endless crowds is displayed on, say, a 30-minute chart as a wide dispersed crowd of candles – there is no focal point, just a good distribution of shoppers. Moves by the market beyond these areas don't usually initiate the next strong move. If you like shopping, you will visit a shop but will return back into the general mayhem. A break from these areas is a scalper's forum as they know 84% of these types of moves return to the pattern area.

Now consider the more-focused volume areas, again on the 30-minute chart. These are like the shoppers having their lunch breaks. When a break comes it will be decisive, going back to our shoppers. They have had their meal and now want to press on; they will go to their next shop decisively or simply return to their cars and leave. Either action is premeditated. Thus we have a stronger market move that scalpers will benefit from but from which position traders will earn more.

These decisive market moves cause gaps in volume markers. When we look at the 30-minute charts you will see very few 30-minute chart candles just as shoppers dodging each other will find sudden gaps in the through-flow of shoppers, permitting you to move faster in your chosen direction without hindrance.

Using a rolling three days of charting, you will quickly see the real volume areas and volume gap areas where immediate support and resistance lies. Likewise any volume gaps that, when a market is given the chance to fill, will do so rapidly. 

But if we compare todays cluster of 30-minute chart candles to yesterdays cluster, we will also see if we are trading below the main cluster of yesterday, which is bearish, or above, which is bullish, permitting you to emphasise your trades to a long- or short-side bias.

Rolling volume

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Source: Saxo Bank 

So scalpers can benefit from the cluster pattern and everyone can benefit from the three day patterns. Just remember you need a liquid market and nothing truly moves randomly as there is always an influencing factor.

— Edited by Michael McKenna

*fxtime is a pseudonym
Raj-900 Raj-900
Really nice articles, thank you very much.
Michael O'Neill Michael O'Neill
Great insight. Your shopping mall analogy really makes the concept easily understandable
fxtime fxtime
I should have posted these two charts as an example yesterday....charts show before and after action on the usdcad


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