Thursday, November 19, 2009

Adios Wave Study, welcome Volume/Range study

The comments received on my last post (in public and in private) suggest, that FFA (Fast Fourier Analysis) will give me the results I seek, but will still fail to predict future price behavior. Meaning implementing that, I will get yet another failing study.

In the back of my mind I know, I have to include volume somehow. I use volume in my trading, when watching the tape, when watching charts form, but I can’t put it in words or formulas.

Prices move up, when there is more buying than selling. But at any given moment in time when a trade happens, buying and selling volume is absolutely equal, equities change hands. This 50 contract trade on the ES at 1105.25 means there was a seller of 50 contracts and a buyer of 50 contracts ES. Volume on minute charts tells you not really something. Sure you can see, what prices did when there was a volume spike, meaning when more contracts where traded. If they move down sellers were willing to accept lower prices just to get rid of the merchandise, but what about the buyers? Why do they buy, when sellers move the market aggressively down. Some have to, but most don’t.

Volume and time are linked, actually volume, time and price are linked. Higher volume for some time at a certain price level tells you there is someone out there, taking all that is offered and betting on a move change. On a volume and on a time chart this is seen as a flat section of the tape.

The wave is the norm, the flat section on the chart is the exception.


Euro breaking down on a 15min chart. You see Sellers making a stand and just selling into the buying after a spike down until you suddenly see the buyers making a stand. There is a spike down initially, there is again that selling, but suddenly the selling is absorbed at the 1.4850 level. There is a final spike down, prices recover and recover into the previous range above the level, the buyers made. Sellers don’t give up that 1.4870 level so easily, it’s the Asian trading session now (charts are on CEST) and volume is light. Still buyers continue to come into the market and force prices further up.

I talked about volume, so let’s add it


That huge bar down is accompanied by high volume. But what does it tell you, how can I fit that knowledge into a formula telling me that the 1.4850 level will be the one, where buyers will make a stand.

Volume * Range will give you a high value, when Volume is high and the range of the bar is high. That’s to be expected, actually. I don’t need an indicator telling me what to expect anyway.

Volume / Range will give me a spike if Volume is high and the Range is small. That sounds a bit more interesting! I should see a spike, when there is someone taking a stand, because then we see high volume and a small range bar.


I will leave it at that…and see, if I get some input from you.