NOTE*** This post is part of an ongoing project to update my “How I Pick Stocks” page on the sidebar to the left. For every new section/update that I make to the page, I will post addition here as a post as well as amend the page itself so that all the information can be read together.
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Volume plays a very important role in the kind of trading that I do, especially in all of my non-scalp trades (ie: Trend Continuation plays, Fades, & Trend Reversal Anticipation plays).
For those of you who have TradeStation, it does not come with a Color-coded volume indicator but you can download the .ELD file from their support forum here for free. I use eKam Volume which is color-coded and also has an average volume line which is very useful.
In short, I use volume as a confirmation or warning signal. If we are in an uptrend, then volume should be greater on the up-bars than on the down bars. If it is not, then that’s a yellow flag and I’ll start looking for some confluence of my other indicators to see if a reversal may be imminent. The reversal signal is most potent when the following criteria are met (in an uptrend):
A.) The volume is greater on the down bars, than the up bars
B.) The volume is greater than the highest volume bar in the prior upward move
C.) Volume is significantly greater than its 50-period Moving Average
That last point can’t be stressed enough, especially on low-volume days where the stock or future is more likely to have moves in both directions on little volume. On these days, fakeouts abound and you should be very careful.
However, if volume is still increasing with the trend, then that means that it is likely still safe to buy pullbacks if all the other systems are green.
I’ll glance at this volume on all of the timeframes I am monitoring. As with practically all indicators, signals that occur on the higher timeframes are much more valid than ones that occur on the smaller ones. But after a very extended moves, I’ll look to the 2-minute chart to give me a quicker signal if things are looking like they are going to reverse.
If volume dries up completely and is just living under its moving average, then we are in a trading range & I’ll be looking to scalp only until we have a decisive range & volume breakout in one direction or another.
Here is an example of what eKam Volume looks like and how I used it just a few minutes ago:
As you can see, the morning rally was accompanied with solid up-volume before price entered a 2 hour consolidation starting at around 10:00 AM. Notice how during this time, volume only once was able to climb above the 50-MA. During this time, I did take a couple scalps, but there is only so much money you can milk from a market like that.
But then at noon, you see a very impressive range breakout which was confirmed by a Vol+ breakout as well. Notice how not only was the Volume bar greater than the 50-MA, but it was 3x greater than the previous bar and and you have to go more than 20 bars back to find anything bigger… This was the signal I was waiting for, so on the little consolidation that occured around 696 I jumped on for a couple points and hopped off minutes later a few hundred dollars richer.
Volume wasn’t the only signal that fired off here signaling a move higher, but it was a powerful confirmation that market conditions were changing rapidly.
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June 23rd, 2006 
Jason 
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