Are you looking at volume when you trade? If you’re not, you should be. Trading just by looking at price only shows half the picture…you can see where price is going, but you can’t tell who’s participating. I absolutely love dissecting price action, so let’s look at today’s chart of the euro, and how you can scalp for an easy 4-5 pips or more based on what volume tells you:
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A) Well, before we get to A, look at the giant volume spike at about 6:35. This was just after unemployment claims had come out and also the ECB was having a press conference that started at the same time, where one of the first things that was said was “Available survey indicators confirm signs of a stabilisation in the euro area economy” and they talked about interest rates. So, since I avoid trading during news volatility, I skipped this first volume spike. So starting with A, what’s going on? It clearly shows traders who thought price would be taking another run to the top, but price is quickly rejected and they’re trapped. The high volume indicates the frenzy of not wanting to miss price rocketing off to the moon followed by the panic of being trapped in a reversal–a setup with very predictable order flow about to happen. Two minutes later there’s even greater volume from longs getting stopped out and reversal-callers getting on board.
B) Not as significant a volume spike, but there was just enough of a pause in price a minute before B to get any late-coming shorts a chance to hop on board…but when price snaps back up, they too are trapped. There’s also volume from prior short profit-taking as well as price hitting a previous area of demand. When B starts bouncing back up, 4-5 pips were easy to snag.
C) If you sit and wait for volume to tell you something, C is an obvious spike in volume. The tape shows us that not only has price broken out from consolidation around 1.3250, but it is also trying to break out from the swing low at 6:30. Well, price rarely moves in a straight line, and to try to deplete all the demand below the swing low after price had already extended itself a bit isn’t likely…another easy fade. Remember, if volume is that big, it means everyone is already on board, so who’s there to keep selling to drive price lower?
D) D is the next spike, with volume most likely created by breakout traders in addition to bottom-callers at C who didn’t take profits and are now getting stopped out. When price hesitates, though, breakout shorts start getting anxious and nervous, and that is exactly the emotion that provides for a good entry! It wasn’t an immediately profitable bounce back, but the hesitation spooked enough people so that at their next opportunity to close out at breakeven or + a few pips (just below D) they took it, and price snapped up offering a profit potential on the long. When I took this trade, I didn’t like that I took some heat (however a manageable 5-6 pips max), but the fact that the continuation volume died off told me there wasn’t anyone serious about shorting at this point, and I held until it popped up and hit my take-profit.
E) Ok at this point, price is definitely going down, anyone can see that! Except that is exactly what the pros want you to think. As soon as this breakout fails, it’s easy pippin’ to the north when shorts cover for a loss. There’s also additional order flow from any previous shorts who got scared on the upspike between D and E and are happy for the chance to exit at breakeven.
F) The volume surge at F shows that now everyone is convinced that we’re back to the uptrend and nobody wants to miss the train. Except that price has just hit a previous area of supply/demand imbalance and has also just taken out the stops that anyone placed above the correction between C and D. If there were any real weight behind this move, price wouldn’t have stalled at the top of F. A stall after a surge in volume means fade the move.
G) After patiently waiting for the next spike in volume, it comes at G when it seems obvious that the downtrend is going to continue. This gets shorts on board, who then begin cursing when they realize they just shorted into the obvious support level formed after F. When price moves back up and they get in the red, they start closing out their shorts in a hurry, and 4-5 pips are easy to snag. Plus, isn’t that the “pin bar” that everyone looks for? (Then notice when the pin bar fails, there’s a rush of order flow the other way when longs are getting stopped, until it hits the support level again…oh forgot about that, now we’re going back up, thanks for the cheap contracts!)
H) The next volume spike is at H, and at this point, it should be kind of obvious that the trend has decided which way it wants to go, so this is an ill-advised short. However, you were given 2-3 minutes to realize that price wasn’t following through to the downside and that you were about to get freight-trained (so scratch the trade)…but, this also shows that no method or strategy wins all the time…you have to deal with the fact that sometimes your take will just be wrong.
I) The volume spike at I was an opportunity for a quick fade, but at this point, we’re in a pretty strong uptrend, and there really isn’t anyone “trapped”, so it’s more risky of a trade. If you can learn to distinguish the times when you are CLEARLY trading against a strong trend and avoid them, your account will thank you.
J) Look at how volume dropped off to its lowest average level of the session just prior to the spike at J. This should be an indication that trend strength is petering out. There is one last moment of panic when any longer-term shorts get their stops blown that they put above A or the spike before A and absolute fools think price is breaking out from said high and going to the moon. When price is quickly rejected and starts coming back into the prior zone, it is finally a safe time to fade the strong move. The difference in J as opposed to H or I is that J represents trend exhaustion, capitulation, and the volume tells us that a LOT of people are in a frenzy (it is 2-3x the volume of H or I).
K) K is a sucker move for anyone who has been sitting on their hands and is now confident that a reversal is in order. But you can’t be that late to the party! Who would be shorting here, directly into support formed before the capitulation high? When you see dumb moves like this, the volume represents people not wanting to miss the short train combined with big money putting in big orders saying “thanks for the cheap shares, but in case you didn’t notice, we’re in an up trend”.
L) This is basically the same thing as A. But there are so many reasons why anyone going long at the L bar is a complete fool–we’ve just had serious rejection at J, anyone who got long in the J region is happy to cut their losses (adding to selling order flow), the smart money who got long at K is taking profits, etc.
There really isn’t anything special about today’s action…pull up another day and see if you can spot similarities. These moves happen day in and day out, because panic and greed never change. The best part is, there’s no prediction taking place. You aren’t calling tops or bottoms, you’re waiting for other people to make calls and then you’re just scalping the predictable order flow when they’re proven wrong and start to panic. There isn’t even any guesswork–a volume spike is EASY to spot, and once you see one, determine who will be trapped if that move fails.
I know I just wrote an entire novel about just 3 hours of price action, so thanks for reading, and I can’t help it, I love this stuff!!
