How To Use Volume In Day Trading

How To Use Volume In Day Trading

The analysis of volume you’ve been taught for trading stocks, Forex and futures is generally designed for trading daily charts, so when learning how to use volume in day trading, you must use a little different technique.

Volume patterns on intraday charts are much different than they are on daily, weekly and monthly charts.

The reason? Before you can use volume signals for day trading, there’s a “metapattern” of volume to every intraday chart that must be understood. Watch the brief video below for more details.

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VIDEO TEXT:

Welcome to this Day Trading Tips Video. And today we are going to talk about how to use volume in day trading.

You know it’s interesting that a lot of people read about volume and get very enamored with the interpretation of volume patterns. And that’s a good thing. It’s good to learn how to read volume for sure. But there’s a big difference in how to use volume in day trading, as opposed to how to use volume on daily charts, where each bar represents one day of activity. And I’m going to show you why that is.

So first of all, let’s take a look at what we’ve got here. We’ve got a nice move up this day, then goes sideways, and then from there it just goes up the rest of the day. During the sideways time we got big volume in here. And that includes this section where the market is retracing. So it’s actually retracing on very high volume. In fact some of highest volume of the day if we take this across.

Then when it goes sideways, volume kicks in to roughly about this level here. We get a little bit of a volume spike in this section, and if we carry that up to the price action nothing really happened in price. It just still stayed within that consolidation. Then we do get a nice little volume spike here, and that does help to propel the market into a new uptrend.

But a lot of people would think then that volume should say strong, in order to sustain that uptrend. And it does not. In fact it stays below the level that we had earlier in the morning. And it stays down into about this zone, until about 30 minutes before the close. So the sustained uptrend, if you notice that, for the majority of the day, stays below the previous volume. Actually it stays about equal to the volume of the contraction period. And it stays below the volume of the morning.

INTRADAY DAY TRADING VOLUME METAPATTERN

So some people might wonder, well that seems strange. How can that be? Alright. There are a couple of reasons for that. Number 1 is that as I said. Intraday volume is interpreted differently than the volume on daily bars, weekly bars and monthly bars. And the reason for that is that intraday, there is what we call a metapattern of volume. And that volume metapattern is basically this …

The key to learning how to use volume in day trading is to understand the intraday volume metapattern.

It will be high in the morning, and then it will kind of come down like this, and then towards the close it goes back up. And that’s your basic metapattern. It’s almost like a saucer but it’s a little more weighted toward the end of the day, and it’s that saucer pattern that is your metapattern. That when you read the individual bars, volume bars with the associated price bars, you have to take into account the metapattern that is fading against the individual pattern for each bar or set of bars.

Not knowing this, is what makes traders stumble when trying to figure out how to use volume in day trading.

You have that on intraday charts because you have most of the volume is on open. And then in the first hour or two of the day, we get a burst of volume at the end of the day, and then during the middle of the day, during lunch and even after lunch. Normally not as much.

IT HAPPENS MOST DAYS, BUT NOT ALL DAYS

Now it’s a metapattern, it’s not true every single day. But it is true most days. That’s surely a general pattern. So this is a general pattern that’s going on, that really doesn’t mean much with regard to interpreting price action. It’s just that’s how the number of participants time their participation in the market, during the day, during day between the open and the close.

So the patterns are skewed a bit by that metapattern. In other words, the smaller patterns, the micro patterns on volume are skewed by the overall metapattern. So when you’re studying volume, make sure that you are, if you are an intraday trader, if you are a day trader, make sure that you are reading volume patterns that are specifically designed for day trading, and not for longer term charts. Now let me show you one more thing while we are around this topic.

So that’s the key to How To Use Volume In Day Trading.

HOW TO READ PURE PRICE/VOLUME ACTION

Now that you understand how to use volume in day trading, let’s look at how to read volume on a daily chart.

Now I have switched it over to a daily chart. And now volume becomes much more meaningful because we are not fighting that metapattern. We are able to just read pure volume patterns based on how price is acting.

So here we get an obvious peak in volume. And the market head going down dramatically, so that’s an exhaustion pattern. And that’s very good. Now here is the key, so we look at that, we mark that and then we look here and we see that the market comes back to retest this low over here.

Now what happens with volume, it’s much lower, much lower. So that’s a signal and you can read this purely with price and volume without having to worry about battling that meta pattern we have in intraday charts. And that’s a good signal that that market is probably going to put in a low there because you don’t have as much strength going down.

Now interestingly, as the market goes up, a lot of people would think, okay that’s a very nice move. That’s a big climb. Why isn’t volume going up? So this is where lot of people misunderstand volume. You don’t always want a dramatic increase on volume to continue a trend, in order to sustain the trend. And the reason for that is that if it’s too strong early on, then all the market participants that want to participate already are in. and there’s not a lot of people to come in later. So a gradual addition of volume over time actually helps to sustain trends.

THE VOLUME PATTERN YOU DON’T WANT TO SEE

Now what’s interesting though, which is we don’t want to see is this. So market comes back down, and then it goes back up. Retest this high. Now when it retest this high, what happened with volume. Okay now volume went actually down. That’s not a good sign for the sustaining of an uptrend. In other words, you want it to maintain but you don’t want it to be too dramatic. So like over here, we were so dramatic and that was the end. Right. That was capitulation.

So you want a nice, steady continuation of line to come into sustain a trend but you definitely don’t want it to decrease. And when the market’s decreasing in volume, and comes back up, retest a high, when ones already been established. That’s not a bullish sign.

Then we get an increasing volume here. Again volume decreases here, alright. And that lines up with this move here. Then we get another increase in volume. We actually make highest high in volume since over here. And when does that happen, that happens right here. That move starts there. And so once again, we get a nice move of volume. Remember it’s an increase in volume, even though the price is going down. So you don’t necessarily want the volume histogram moving in the same direction as price. If you want to see a strong move, you just want to see good volume.

And again, because it reaches up to this high, it’s an exhaustion pattern. It’s an over extension of volume. And again, it’s coming back down to this support level over here. Which is already established. So that support level combined with an exhaustion pattern of volume indicates that that’s a very high probability low and that’s probably going to be at at least for now.

So that’s how you read volume when you are just reading it purely. Just understand that when you study volume, whether it’s in the book or course whatever, you have to study the patterns and volume for daily charts and then you have to also be sure that if you want to know how to use volume in day trading, you’re studying different patterns.

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