Price, (Volume), Support, Resistance, Demand, Supply . . .

[TheBramble]

Let's try a different approach:

What difference does it make, at least in terms of practical application to realizing a profit in trading?

I'll take a shot at this one.

If volume is 'causative' (i.e. volume is causing the price to rise) then there is genuine buying pressure. There is less willingness to sell than to buy and the bids have to increase to induce selling.

If volume is 'subjective' (i.e. volume is increasing because the price is increasing) it might be a professionally induced setup in preparation for distribution.

The difference being that you might want to get on board and go long in the first instance, but may prefer to sit out (or even take a short position) in the second.

How the heck you can deduce which is which though is a mystery to me. But does the logic 'sound' right?

 

[JumpOff]

Let's try a different approach:

What difference does it make, at least in terms of practical application to realizing a profit in trading?

I have understood you to say that buying and selling pressure can be sometimes be surmised from looking at volume. (I assumed you were talking about stocks or other instruments where the actual supply of the items in question are limited, -perhaps I misunderstood you).

If you say that the volume of spx units traded sometimes has an influence on the SPX price, then this calls into question your basic logic skills, or my alternatively - my understanding of how the SPX price happens. If I am wrong, I want to understand and correct my error.

Every trader I know believes they have some way of understanding what the market is doing. I believe those who say this isn't so are kidding themselves (if they believed their own rhetoric, they would randomly choose entry points, and use simply money management to handle profits and losses.). Some use charts and pure price action, some use TA, some level II or depth screens, some fundamental analysis. The whole purpose of "choosing an entry point" is to pick a time you think the market is least likely to go against the position you take. The reason traders don't randomly pick their entry points is because there is a cost involved each time we take a position.

If the volume of units traded can not be used to help choose an entry or exit point in the indexed markets (other than showing that there is adequate liquidity) then I don't want to include it in my method of looking at that instrument. Practical application requires me to focus on things that help me choose entry and exit points.

Thanks,
JO

 

[dbphoenix]

So you're defining volume in terms of a bar or of units of some sort?

 

[JumpOff]

I define volume as the measure of units transacted per unit of time. I suppose it could be represented graphically as a bar or something. My point is that the indexes are calculated on the value of the underlying stocks. It doesn't matter if 1million indexed units change hands over a given period, or only 2 units change hands over that same period. According to the CBOT and CME the price of the indexed units are independent of the volume of indexed units transacted. Do you agree wtih them?

My purpose in pursuing this is to confine our discussion of the role of volume to the markets where it affects price.

JO

 

[dbphoenix]

I suppose I agree with them, assuming that they're willing to concede that a trade must take place in order to determine a price.

So are you saying that in order for volume to have meaning for you, it must be stated in terms of units of some kind and that you must know its origin (going back to the SPX/ES/stock thing)? If so, can you conceptualize buying/selling pressure independent of these units and independent of their source?

 

[JumpOff]

I suppose I agree with them, assuming that they're willing to concede that a trade must take place in order to determine a price.

The exchange would say that trading must take place in the underlying stocks in order to determine the value of the individual stock. They would not concede that any trades have to happen on the index. The SPX was calculated and published (but not in real time) before it ever becamed a tradeable instrument.
From what I read an exchange uses a mathematical formula running on a computer (probably a network of computers) to set the price of indexes like the SPX, ES, etc.. Modern technology enables an exchange to monitor, weight, calculate and aggregate all the individual stocks in real time. Then traders 'take it or leave it.' The price of the index is derived* by applying the formula to the underlying stocks and remains so even if no one wanted to buy or sell it.

JO
*hence the name 'derivative'

 

[dbphoenix]

Which takes me back to my original question: what difference does all this make in terms of practical application? If you're trading futures, are you not going to take a position until you've not only checked the volume of all the component stocks of the index upon which the future is based but also determined the reasons for the volume and strength or weakness thereof?

 

[JumpOff]

Which takes me back to my original question: what difference does all this make in terms of practical application? If you're trading futures, are you not going to take a position until you've not only checked the volume of all the component stocks of the index upon which the future is based but also determined the reasons for the volume and strength or weakness thereof?

I doubt that there would be time to do all that before taking a position on the futures market for SPX, (which I think is your point). But if I know the volume of shares of SPX traded does not affect the price, then maybe I can go on to determine what does.

We have seen that many stocks within a sector move in tandem, or that economic news affects many stocks in the same way. The price action of the individual stocks will be telegraphed through to the index, so even if we can't trade on volume, perhaps what appears as support and resistance in the index are tradeable areas.

JO

 

[dbphoenix]

It's entirely possible that the exchanges since post 274 [now 215] have been for nothing. Ramirez seems to have abandoned the field, and my responses were originally directed to him. Therefore, before all of this swirls into fractured focuslessness, I suggest that anyone who remains interested go back to post 274 [now 215] and start over.

So far, no one has explained why the volume on some instrument or stock or some something else should have any affect on my decision to enter a position on whatever it is that I'm trading. If price is going up and the buying pressure is there and I recognize a setup that I've tested and found worth taking, then I'll take it. If I wait to confirm the buying pressure with some other instrument or stock or whatever AND wait to find out its source, the trade is gone.

As for the difference between "volume units" and buying/selling pressures, we get into the perceptual and conceptual readjustments that I've referred to earlier. Perhaps one needs to eliminate the volume display from his charts in order to understand what I'm referring to, though Tom Williams fans may blanch, gag, and collapse prostrate where they stand.

Writing about movement is a great deal like teaching a pig to sing: it doesn't do any good, and it irritates the pig. If Ramirez has lost interest in this, I'd rather just drop it.

 

[JumpOff]

So are you saying that in order for volume to have meaning for you, it must be stated in terms of units of some kind and that you must know its origin (going back to the SPX/ES/stock thing)? If so, can you conceptualize buying/selling pressure independent of these units and independent of their source?

I think the term 'useful' is better for me than 'meaning'. In order for volume to be 'useful' to me, it must contribute to my understanding of price action. Your document about Demand/Supply was most helpful to my understanding the price action of stocks.

Your statement that low volume levels are characteristic of indecision makes perfect sense to me. High volume indicates that the herd has made up their minds, decided to do something different than they were doing a moment ago, and they are busy doing it. The interesting thing is that at any given moment, equal components of the herd are each going short, going long, getting in, getting out. People who bought a stock last year, and plan to continue to hold it for the next 5 years are recorded in the 'open interest,' but these folks are not part of the action now.

I conceptualize of buying/selling pressure by thinking of actual people (or institutions) that are part of that herd.
Selling pressure comes from these folks:

• They own the stock, price is rising and they have decided to take profit.
• They own the stock, price is falling and have decided to cut their losses. *
• They are shorting stock they don't own because they believe the price will fall.
• They own the stock and want to keep it, but are forced to sell because they need their capital for other things (they are retired and need the cash for monthly income) *

Buying pressure comes from these folks:

• They don't own the stock, but want to because the price is rising and they think it will go up some more.
• They don't own the stock, but want to because the price has been falling and they think it is now a bargain.
• They shorted a while ago, and now they are taking profits.
• They shorted a while ago, and now they covering losses. *
• They have no love for this particular stock, but at 40 years old- they have to invest somewhere. They think a mutual fund is safer than buying a rental property, (the fund manager has to keep the money active). *

I'm guessing the reasons marked with an * denote a greater sense of urgency, and perhaps cause more violent price action when they are present.
That's as far as I've got.
JO

 

[JumpOff]

It's entirely possible that the exchanges since post 274 have been for nothing. Ramirez seems to have abandoned the field, and my responses were originally directed to him. Therefore, before all of this swirls into fractured focuslessness, I suggest that anyone who remains interested go back to post 274 and start over..... If Ramirez has lost interest in this, I'd rather just drop it.

OK, I get the hint. I'll watch for a while. Thanks for the screen real estate. Our exchange was very helpful to me. Nothing clarifies my thinking like having to write it down for others to see.....
JO

 

[dbphoenix]

You're over-conceptualizing. You're trying to create a checklist when you should be trying to draw waves and circles without lifting your pencil from the paper. The ocean doesn't think about all possible reasons for moving and how many reasons currently apply to a movement it's thinking about making.and whether or not there are sufficient reasons for it to move. It just moves.

Pressure is not yes no. Pressure is degree. Even a seemingly stagnant pool is in motion.

 

[dbphoenix]

The posts are out of order. My last should come before your last Ditto the one before that.

In any case, perhaps we're done.

 

[Remiraz]

As far as this thread goes, it doesn't matter. If whatever you're trading goes up, then there's an imbalance between buying pressure and selling pressure. This does not mean that you can't use something else -- or several something elses -- to confirm or not whatever it is you think you see.

However, this gets into setups and testing and strategy, which is best placed in your own thread, particularly since you seem to be viewing all of this within the context of scalping for ticks, and the bulk of what is here doesn't apply to that, or at least is not intended to.

Didn't you tell me to back off in the post quoted above?
This is a great thread and I'm a newbie trader, I don't want to hijack it because of any misconceptions I might have.

My original line of thought was:

1) Buying pressure and Selling pressure is triggered by changes in the SPX

2) Therefore, a huge buying pressure at a "support" level in the ES does not confirm the support because if SPX fall pass that level, ES will follow.

3) Thus, is analyzing volume really an edge? Does it really determine whether certain levels are important? In a Stock we know that players can "support" a stock if they do not wish it to drop beyond certain price. But for ES, can anyone actually "support" it if SPX fall pass that certain price?

Summary :

Are support/resistance levels really "important" levels due to supply/demand or are they just random formations in the SPX?
How can these levels be "important" when whether they'll be broken or not depend on the SPX and not supply/demand?

 

[dbphoenix]

No, I did not tell you to "back off". I said that your own thread was the more appropriate home for a discussion of specific setups and strategy, particularly if you're scalping. Please don't put words in my mouth.

As for your last question, again, what matters is the effect of buying and selling pressure. If the source of the pressure and the reasons for it are important to you for some reason, then you will probably lose the trade in the time it takes to find out whatever it is that you want to know.

 

[JumpOff]

As you were...

Ok,
After several days of reading, studying and reflection, I'd like to officially take back all the stupid things I said about volume and derivatives. (If I only knew what they were, I'd know where to start! Ha!) I am finally getting my brain around the idea that the price of index futures has its own reasons (in addition to the spx cash price, fair value, and how far out the contract is), and that these sentiments have an affect on other markets - including the underlying indexed instruments.

I still don't understand the relationship, but at least I've figured out that I don't understand it.
JO

 

[dbphoenix]

My "what difference does it make" question still applies.

As long as one searches for something which will tell him what he's looking at rather than just look at it, he's going to be confused, because there's no way of knowing whether whatever it is that he's using for a guide is in any way accurate or not.

One can trade reality or one can trade indications of reality. One can try to determine whether or not it's raining by consulting a barometer, or one can determine whether or not it's raining opening a window and sticking his hand outside.

 

[JumpOff]

DBPhoenix asks: What difference does it make?

Because pattern recognition is the most useful skill for reading a chart. The purpose of reading a chart (or level II or market depth) is to be *ready/aware* that a reversal may be coming, to *wait* for confimation (trend is continuing or has reversed), and to *act* when you can enter a trade with the least amount of risk (a point where the next few bars will quickly tell you if your assumptions are correct or if it's time to take a quick loss and analyze what you did wrong).

These same skills enable you to decide to how long to let the trade run.

Although it may be obvious to you (and many others) that support, resistance, and volume all come together to tell you things about what kind of buying and selling pressure is happening now (no matter what is being traded), I am still learning about what kinds of instruments are being traded and how. (as an example, -just a few weeks ago I wasted hours looking for a source of volume data for the forex markets).

My questions over the last 20 or so posts had to do with the central question, "Is volume part of the relationship I need to learn about in order to recognize price patterns on derivative indexes?" Since this is something I have to know before trading with real money, I figured it was worth the questioning - now matter how embarrassing the result. In my ignorance, I was confusing the calculated SPX value with the SPX futures contract that is actually being traded. So now that I've got that answered, (yes, volume is one of the pattern components I need to become familiar with - no matter what is being traded) - I can go on to the next issue.

Really y'all, next time you see me trying to drown in a puddle, suggest I roll over onto dry land, will ya?

JO

 

[dbphoenix]

You're using the answer to a different question to answer my question.

You're trying to use the volume on one index or whatever to trade something else. My question is what difference does it make? If you're trading the ES, trade the ES. What does the volume on the NQ or YM or SPX or anything else have to do with what you're trading? If it has an effect, you'll see it. If it doesn't, you won't. Either way, what difference does it make?

Focus on what you're trading. Let everything else take care of itself.

 

[JumpOff]

If you're trading the ES, trade the ES.

Right. That's what I meant.
JO