After last week’s article I received several emails asking me to expand on the topic of volume and tick charts. Since they are unfamiliar for many traders, I decided to dive deeper into the topic. These types of chart can be really useful to increase your chances for success.
First, in order to create the tick charts, you must format your chart. There is no exact number to use for the size of the chart, you will have to use larger numbers for higher volume stocks and lower for light volume stocks.
In the “Interval” section, the “tick” refers to the number of trades made, not the size of each trade. I have chosen the “Volume” interval so that each candle is based on the shares traded, not just the number of trades.
Now, when using the chart to find quality levels of supply and demand, you must think like an institution, not a retail trader. Most traders incorrectly believe that they should be looking for high volume to confirm trends and also for entering trades. This makes no sense if you think about it.
Supply and demand zones work as entry and exit points because there are leftover orders from the institutions. This would imply that we are looking for a large candle leaving an area of basing. In the example of a demand zone, this would mean that we left that area with very few buy orders being filled and no sell orders holding price down. There would likely be a lot of leftover buy orders to cause prices to bounce if they return to that zone.
The same would help find a supply zone. You would want to find a zone where we left a basing with a large red candle. Prices moved fast with only a few sell orders being filled. There was a lack of buy orders in that zone and if prices return, the remaining sell orders that were not filled should cause price to drop quickly.
The volume charts can also assist when looking for the end of a trend. Most novice traders have been taught to look for an increase in volume to sustain a trend. This is also counterintuitive. When the volume increases it means that all of the traders who were interested in joining the trend have done so. The trend will only continue if there is renewed interest and new orders coming into the market.
A sign of trend weakness in volume tick charts would be when you see several small candles together. Remember that each candle is volume based, not time based. A small candle or one with no body, (doji) means that there is enough opposing pressure to halt the trend. This could be a pause in the trend or if it occurs at a zone of supply or demand a reversal of the trend itself.
Neither Freedom Management Partners nor any of its personnel are registered broker-dealers or investment advisers. I will mention that I consider certain securities or positions to be good candidates for the types of strategies we are discussing or illustrating. Because I consider the securities or positions appropriate to the discussion or for illustration purposes does not mean that I am telling you to trade the strategies or securities. Keep in mind that we are not providing you with recommendations or personalized advice about your trading activities. The information we are providing is not tailored to any individual. Any mention of a particular security is not a recommendation to buy, sell, or hold that or any other security or a suggestion that it is suitable for any specific person. Keep in mind that all trading involves a risk of loss, and this will always be the situation, regardless of whether we are discussing strategies that are intended to limit risk. Also, Freedom Management Partners’ personnel are not subject to trading restrictions. I and others at Freedom Management Partners could have a position in a security or initiate a position in a security at any time.
Editors’ Picks
EUR/USD drops below 1.0800 after German Retail Sales data
EUR/USD has come under fresh selling pressure and trades below 1.0800 after the data from Germany showed that Retail Sales declined by 1.9% MoM in February. Resurgent US Dollar demand is adding to the downside in the pair. US data are next in focus.
GBP/USD stays weak near 1.2600 amid market caution
GBP/USD remains defensive near 1.2600 in European trading on Thursday. The hawkish tone from Fed Governor Christopher Waller keeps the US Dollar afloat amid a cautious trading environment ahead of key US data releases and the Good Friday trading lull.
Gold price holds strength ahead of US core PCE inflation
Gold price holds onto gains near $2,200 in Thursday’s European session. The precious metal exhibits firm footing ahead of the United States core PCE Price Index data for February, which will be published on Friday.
XRP price falls to $0.60 support as Ripple ruling doesn’t help Coinbase lawsuit against SEC
XRP programmatic sales ruling by Judge Torres was completely rejected by another US Court that ruled in favor of the SEC in a lawsuit against Coinbase.
Portfolio rebalancing and reflation trades emerge into Q2
Yesterday’s price action pointed at a possible end-of-quarter portfolio rebalancing as the session saw the laggards of the quarter like Apple and Tesla gain, and the stars like Microsoft and Nvidia retreat.
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