Using Trading Volume to Avoid Whipsaws and Head-Fakes

Volume is defined as the number of shares or futures contracts that trade in any given time.

Since every trade has a corresponding buyer and seller, volume represents a trade between two parties.

But when is trading volume actually important?

Always!

In this article we discuss just one of the many ways you can use trading volume analysis to improve your analysis and trading accuracy.

Want to learn more volume trading strategies? Check out this article on our favorite volume profile swing trading strategy >

 

Using Trading Volume to Trade with the Trend

There is a saying in trading that says, “the trend is your friend”.

But how do you know which direction trading volume is telling you is the trend?

You follow the direction of volume.

Here are a few rules to guide your trading volume analysis:

  1. When volume is increasing as prices are increasing, the trend is up
  2. When volume is increasing as prices are decreasing, the trend is down

In a moment I will walk you through a few examples.

But before we get there let’s look at a few more rules. What happens if volume is decreasing as a stock (future, currency) price is decreasing?

It is not a reliable trend you want to trade with.

 

Trading Volume Examples – Trend Confirmation & Trade Timing

In this example below, you are looking at a one hour chart of the “SPY” ETF, tracking the SP500 stock market index.

At the bottom you can see the volume, and in the top is the price action.

SPY Trading Volume

SPY Trading Volume

Let’s break down each section above.

Section #1 – Price Increase, Trading Volume Decrease

  • As the price of the SPY ETF went up, volume was decreasing at the bottom
  • This upside move is against the trend
  • The opportunity here was to wait for a short, avoiding the head-fake rally

Section #2 – Price Decrease, Trading Volume Increase

  • As the price of the SPY ETF went down, volume increased dramatically
  • This downside move is the right trend direction
  • The opportunity here was to short and ride the wave lower
  • This is an example of a low-risk high probability trade

 

Using Trading Volume – Conclusion

Trading volume is a must have for your charts.

It will guide you in the right direction, and prevent you from getting into low probability trades, which are often losing trades.

Always look to trade with volume, and your results will improve significantly.

When you apply this trading volume tip to your strategy you will be trading with the professionals, and against the retail herd that are predominantly losing traders.

 

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The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.