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5 Simple Volume Trading Strategies

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Volume Trading Strategy is a popular searche on Google. More than 77 million results can be found for this search query.

The study of volume trading strategies is highly interesting. Traders learn in this article:

  • Read charts and understand the market. Negative experiences are also useful. When you learn that something doesn’t work, you cut it out and get closer to knowing what really works
  • Maintain discipline and control risks
  • Develop plans and respect money management

Classification of Volume Trading Strategies

All strategies can be divided into 5 types under certain reservations:

  1. Trading in one range
  2. Trading with a false outbreak
  3. Acting with an outbreak
  4. Trading in a trend rollback
  5. Acting against a trend

Kuez said the first two – range strategies, the next two are trend strategies and the last strategy is a counter-trend strategy.

Volume trading strategies are no exception. The above classification also applies to trade without volume indicators.

In this article, we will look at and discuss each of the strategy types:

  • Principles of their use
  • Signals for entering a long or short based on cluster and volume analysis

Each of the strategies contains a chart example from the real market. In addition to a standard volume indicator, we use the following tools:

Let’s make an important statement before we start reviewing the volume trading strategies.

We will not look at the general market context in each of these examples. In real trading, it is important for every trader to keep an eye on the current market state, i.e. “context” or the overall picture. However, if we were to do so here, the article would be too long and too subjective.

Our goal is to collect different trading strategies and demonstrate the logic of possible actions of the trader and the practical uses of the ATAS platform.

Value judgment is applied in the strategy discussion. If you are looking for a strategy for “Sell when the red lamp lights up, and buy when the green lamp lights up”, this item is not for you. We agree with a forgotten stock exchange expert, George Selden, who wrote at the beginning of the 20th century:

“I think the desire to find a simple mechanical formula is responsible for most of the losses on the stock market.”

George Selden

One more thing. All trading strategies that are now being looked at further are universal strategies that naturally work in all markets and periods and take into account the specific characteristics of each instrument. Setups could be visualized in the charts in an endless number of variants, but the basic principles (such as demand and supply as well as effort and result) remain the same.

Volume Trading Strategy 1: Trading in one range

Logic. The strategy of trading in a price range means that the market is inactive and the balance between supply and demand has stabilized. A trader does not expect this situation to change radically in the near future, and decides to trade based on the levels of support and resistance that are manifested in the graph:

  • Purchase from the support zone (lower limit of the range) with the aim of making profits on the resistance zone;
  • Sell from the resistance level (upper limit of range) with the aim of making profits on the support zone.

For example: Purchase of Gazprom – Shares:

Gazprom shares constituted a long-term support level of around RUB 150 in November and December 2018. When the price fell to this level in March 2019, the market became interesting for those who thought that the price would rise and enter the range with peaks at about RUB 165.

We will look at the reversal of the range of RUB 150 in March in an hourly chart (remember that this is done without analyzing the general historical context and metrics).

volume trading strategy

The chart contains the following indicators: Zig Zag Pro , Delta (the difference between buy and sell) and market profile that covers the reverse area.

How should a trader understand that a real reversal of the round support level of RUB 150 takes place when he returns to the area that affects long periods of time?

  • First fact. There is no desire on the part of the market to develop a decline of 28 March (low of wave 3) and a rapid recovery of daily highs above 150. This suggests that massive red clusters at the low point of wave 1 are panic selling, which usually ends the downward movement and forms an upward reversal.
  • Second fact. Wave 9 has the lowest volume (882,000) among the previous downward-facing waves. This suggests that sales pressures are exhausted and the market does not have enough fuel to move downwards. The market is not interested in the further downward movement. The arrow shows how the downward-facing wick on the clusters becomes thinner. There are no dealers there who want to sell cheaply.
  • Thirdly, the fact. A strong opening with a small gap up on Monday, April 1.
  • Fourth fact. The profile looks like the letter ‘b’.

Based on the above facts, a trader concludes that the market has fewer chances of breaking the point of control (POC) level at 149.5-150, and would most likely rise higher. Thus, the entry into a long position after the market opening on 1 April is justified.

The stop could be below the low of the reverse formation, for example at 140.40. The target is the previous highs around RUB 165. An approximate CRV is 4.5-1.

Example 2: Sale of EUR/USD Future:

The events of the end of June 2019 enabled us to act on the reversal of the level of resistance.

volume trading strategies

Federal Reserve Chairman Jerome Powell delivered a speech on Tuesday, June 25. We will not discuss the subject of the speech, just note that the market has been very sensitive to this event. The arrow points to the candlestick with a high volume and marks the market reaction the moment the chairman of the Federal Reserve gave a speech.

The prize tested the extreme points of the ‘Novelty’ candle several times over the next two days and returned to the range or balance. Clear area contours were formed.

The red oval in the previous graphic shows the approach to the upper limit of the range on the third day – on Friday, June 28. As we can see post factum, the price has reversed. But we are interested in process mechanics. Consider the reversal in detail during a smaller unit of time.

volume profiles p
  • The first arrow points to the buying panic of wave 1 with an impact on a positive delta. The price reached the level of 1,146.
  • A flat movement developed after the panic and the waves 2-3-4 had formed.
  • Wave 5 is interesting as buyers seem to be trying to push the price up through the highs of 1-3. But the attempt failed. Buyers fell into a trap rather than make significant progress, and watched disappointed lyrised as Wave 6 unfolded.
  • By the way, wave 6 has an extent both in volume as well as in length and progress (compared to the previous downward-facing waves). It’s a bearish sign.
  • Zigzag 7-8 increased the convexity at horizontal volumes close to 1.1475 even more.
  • Wave 9 gives a clear indication for a correct assessment. It is another, but even more pronounced, failure of buyers. The second arrow points to a considerable effort by bulls. Many purchases were made there. But the real progress was minimal. The price increased the previous local high only by a few ticks. And right at the next bar came the counter-movement. This bull trap for buyers clearly shows that the market does not want to break out of a short-term equilibrium area (note the profile formation in the form of the letter “p”).

So if they don’t want to go up, we’re waiting for their downward movement. Resistance has every chance of holding. The time of the beginning of the development of wave 10 is a chance to take shorts.

Let’s say we recognized the reversal in time and:

  • opened the sale at 1.14575
  • recorded a stop loss behind two red lines at the level of 1.14710 (the risk is 0.002)
  • Place our goal closer to the lower limit of the range marked in the previous table. In other words, at 1.1425 (the profit is 0.005).

In this case, the CRV would be 2.5. The setup was formed in the morning and the price reached its destination in the afternoon.

Summary for volume trading strategy in one range

Let’s draw some conclusions on the volume trading strategy of trading by inversions within a range:

  • The previous price action marks the range boundaries.
  • Pay attention to the moments when the upward-facing waves lose their power as they grow to the resistance level, and the downward-directed waves begin to lose their power as they fall to the support level. Reducing the volume in a wave can inform us about the weakness of traders attacking the level.
  • Monitor the profile and formation of bell patterns. More often than average, the p-shaped profile is formed at a downward reversal, while the b-shaped profile is formed at an upward reversal.
  • To find an entry point, pay attention to the color change in the delta or the price response for larger clusters (for example, an outburst of the maximum volume of the previous bar).
  • Look for a CRV in your favor that should not be below 2:1. Such a model would allow to be on the positive side, even if the ratio of profitable trades is 50:50.

The strategy of trading with inversions from the range boundaries is closely associated with false outbursts. The reason is usually that a reversal is a slightly more complex structure than a false breakout.

Volume Trading Strategy 2: False Outbreaks

Logic. Especially beginners often notice that the market deliberately “fishes” their stop losses before it starts to move in the right direction. It’s annoying if you make a correct forecast but still make losses. This is because the majority of traders (as if they had reached an agreement) record their stop losses in obvious places. These are usually the extreme points to date.

Trading false breakouts provides that the market is interested in activating stop loss effects of the mass. In this way, an important player can raise liquidity and improve his positions. That’s how the market works.

There is a downside to this tough game for the biggest money in the world. Earn money where others lose. This is the reason why the ability to trade false breakouts (massive activation of stop losses behind the obvious extreme points) allows entry into the market with a profit where the majority of traders leave the market at a loss.

Example: Selling a Gold Future:

Let’s look at the gold futures market, tick chart, 1 candle = 500 ticks.

The gold market posted an upward trend from the previous day’s high on 7 June 2019 (the level is marked with a red line). On the wave from point 2 to point 3 an increase of purchases was registered (you can see it in the lower bar chart in the green delta). The imbalance also sends “loud” signals (green lines at the end of the wave). This wave 3 “accumulated” the total volume of 11.3 thousand contracts. The market seems to be strong and the success is to be expanded. However, it was too obvious to be true …

Wave 4 has completely “swallowed” the growth progress of wave 3. The imbalance indicator also changed its behavior drastically, recording an unexpected overweight of sellers. Is something wrong? Suspicion leads us to the idea that this outbreak is wrong.

Wave 5 confirms this idea because it has a “small” cumulative volume of only 5,800 contracts, which is twice the previous growing wave 3. Perhaps the growth of point 5 reflects the situation that there is no demand.

So everything is right. The small increase in purchases (and the activation of Imbalance) on the movement of (wave?) 3 reflects the activation of stop loss of sellers (and also the occurrence of inexperienced buyers). Such an activity does not create a prospect for sustainable growth, so getting into a short position becomes rational. You can open sales on wave 6 with the stop near the top of wave 3. The goal is to test the daily low at 1,334. An approximate CRV is 2.5-1.

Example 2: Buying a USD/RUB Future

Consider the recent false outburst of lows in the USD/RUB futures market.

The chart below shows a cluster view of the trading history on the morning of the June 27, 2019. The red line marks the local low of the previous day (it was formed on Wednesday, June 26, at the level of 63.708 19:30).

The activity in points 1-2-3 formed two shocks of the previous local low (it is marked with the red horizontal line). It is interesting that the volume in the descending wave 3 is very high – 66,000 contracts were traded. And these were mostly sales, as can be seen from the delta. However, the progress for sellers is not great. Wave 3 has only the high-low of 23 ticks, which is many times below the similar value of the previous downward wave – 88 ticks. While the volumes (79K and 66K) are quite comparable. As a result of inactivity, a convexity in the form of the letter ‘b’ (extended in our diagram) was formed in the market profile.

If ‘heavy’ sales on wave 3 reflect the real pressure of sellers, why did the next wave close 4 above the high 2? This means that the activity in the area of the previous local lows 1 and 3 is an activation of stop loss by buyers who had hidden their orders in a far too obvious place. The sales were also provided by traders “for an outburst of support”.

Wave 7 shows the decreasing volumes of 23.9K. The bears are fading. A test of the point-of-control profile was performed, which is shown in the graph from the point of view of a horizontal volume analyst. The black line in the bar chart is another confirmation of “fatigue”. It reflects the dwindling dynamics of the volume traded. This is far from the activity observed at lows 1-3.

For this reason, it is not a bad place to buy to open a long-near-low-7 or at the beginning of wave 8. The green arrow points to a strong bar (a volume in a positive delta).

Adopted:

  • buy – 63,720;
  • Stop – 63,660 (60 ticks);

Target – 63,860 (140 ticks) – at the level of the local high from which the wave (1) fell. The target was reached at 12:40 p.m.

The CRV is 2.3: 1.

Summary for trading false outbreaks

The result for the wrong breakout trading strategy is generally similar to the result of the reversal strategy. Why? Both strategies describe the “non-breakout” market activity in the area of significant support and resistance levels.

  • Look at the previous price action if you’re trading with false breakouts. It marks local extreme points. Over time, stop orders of a large number of minor traders accumulate there.
  • Volume occurs, but the price rolls back low after the thrust.
  • Green deltas at the outbreak mean the activation of stop-losses of the sellers and the entry into a trap of reckless buyers. The opposite is the case – red deltas in the support push mean the activation of stop-loss effects of the buyers and the entry into a trap of reckless sellers.
  • A false eruption could not only take place at the level of the previous extreme point. A ‘Subversion’ can occur when a round number is exceeded. Let’s say 200 USD for an AAPL share. Or USD 200 for a TSLA share. Round levels serve as significant support and resistance levels in their own right.
  • Monitor the profile. The formation of a “convexity” reflects activity when traders who believe the outbreak is true enter positions that would turn out to be traps. In the case of downward reversal, a p-shaped profile is formed more often than the average. When the beam is reversed upwards, a b-shaped profile is formed.
  • An input signal could be sent by indicator data (for example, when the delta changes color) or by the price/cluster action. Assess using facts to capture the beginning of a fluctuation that has a perspective to develop into a significant wave. Earn money where others lose. Keep the CRV in your favor – no less than 2:1.
  • False outbreaks are more common in moments of higher volatility – when sessions are opened or messages are sent.

Summary of Range Strategies

The described 2 strategies – for trading inversions and false outbursts – are best suited for working in markets that are in a range. For example, if consolidation is emerging at a longer time, monitor the price movement when it reaches local extremes at a shorter time.

The main difference between reverse trading and false outbreak trading is that a reversal is a more complex process, while a false outbreak can only be a temporary spike.

We will discuss this difference later. Don’t miss the second part of the volume trading article, in which we discuss the following strategies:

  1. Act on an outbreak.
  2. Rollback trading.
  3. Act against a trend.

In the meantime, they can:

  • Download ATAS for free
  • Set the Delta and Zig Zag indicators in the Cluster Chart
  • Mark the nearest support and resistance levels after 1 hour
  • Watch the waves and deltas closely

We hope this information has helped you.



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