Volume 6
Volume is king


You know, sometimes you just have one of those days. Everything goes your way, and it seems like you can’t lose. Traffic lights wait on you…0dtes fall from the sky and land in your trading account profitable with very little stress…your garden flourishes like the land of the Cyclops in The Odyssey.

Watch out for those days. They can wreck you.

Today, we’ll examine my trading day on 12/28/21, and we will be discussing the importance of volume. On the 28th of December, I was feeling pretty good about life and I was out trolling the hunting grounds of some big ETFs. I went 3 for 3 in SPY, QQQ, and my least favorite of the three, DIA. Let’s look at each of these relative to my entry and exit strategy. The image below are the confirmations of these buy and sells.

I spend a lot of time studying how to scalp the SPY and QQQ ETFs. I have increasingly been using the ORB to scalp these instruments, and I intend to continue my focus on them. I also sometimes take positions in the DIA however, I tend to not do as well there (this story needs a volume of its own!). However, on this day I saw the setup in the DIA image below.

But first, let’s notice the time stamp. If you are a new trader, you will notice that many traders sit out the first 15 minutes of the trading day. This is a wise move! It is simply so volatile that it pays to be patient. You see the familiar ORB15 setup on these charts with the thicker dotted green line serving as a possible call trigger and the red dotted put trigger. It’s not as simple as going in as soon as the price action breaks one of these levels…you need a few more things to make profiting more probable. And again, here is a great video from Trade Talk Media’s “Trading Made Simple” series on trading the ORB.

So, class… look at the DIA chart on the board below:

I typically do not enter as soon as the price breaks if impressive volume is absent (for an unsuccessful exception, see volume 5). The DIA was on my radar in those first 15 minutes as it was progressing upward toward the call trigger. The blue line on the chart is the 34 EMA and the yellow is the VWAP. I do sometimes use VWAP as a data point when building a trade…it can be helpful as support or resistance at times.

At the BTO shaded oval, you see the huge volume bar at the bottom of the chart. That coincided with the second green candle opening and closing above the ORB call trigger, and I felt confident going in at this point with a slightly larger position that I usually employ. My finger was on the sell button the entire time, of course this type of scalping requires active monitoring. I never have more than one open at a time. This was a bigger position than my norm, and I definitely have the discipline to exit if a trade goes against me. Also, it seems like I am always skeptical when I enter a trade. But this one felt good.

Why is that?

So, back to that image above. Entry criteria include 1) price is through the ORB 15. 2) it is above the 34. And 3) a huge volume candle printed. That last thing is The Thing. When you are new to trading, be aware that you need volume to keep a short-term move moving.

Volume powers the chart. Technical analysis might be the engine, but volume is the gasoline. Volume is king.

And, remember my trade intention with this was a lightning scalp (see volume 2). I only wanted several green bars out of this move. That volume made me feel as if probability was on my side. So, I market-ordered in, and the trade was live.

NOTE: I use Tradestation as my broker, and I am comfortable (most of the time) with marketing in and out of scalps. This is not the case with all brokers, so be sure to work out with paper trading and/or small positioned trades how you want to approach opening and closing scalp trades. This is very dependent on your broker, so read up on that quite a bit.

So, I was in at the shaded oval on the chart. Several nice candles brought us to the smaller dotted fib level. Often this can serve as either resistance or become support. Volume can help tell that story. Speaking of the Great God Volume, notice that as the price climbed, volume bars successively decreased. No huge deal, but it did get my finger closer to the sell button as the trade crossed the fib level.

So why did I exit at the time I did, indicated by the second shaded oval on the chart?

That’s correct…look at that monster-esque volume bar on the selling candle. I sold when it crossed the fib level with volume. Since my position was slightly larger than normal, I was ready to go. I was happy with the gains, and I happily sold my contracts to the buyer on the other side of the transaction who offered me 1.75 per. I was Green and Gone, feeling like a bit of a bandit having taken the trade from 1.67 to 1.75 for close to a five percent gain. An eight dollar gain (per contract) is nothing to frown about for six minutes of your time.

Then, not much later, we get to the QQQ scalp depicted in the image below.

If you read this column regularly, you might immediately notice this is an atypical entry for me. And our focus for this volume (no pun intended), Volume, was not really a factor. This trade was simply a play on the price action retaking VWAP. Here is more info about what VWAP is, and why it is important. I usually don’t take trades based on VWAP alone, but I did notice earlier in this chart that the last time it retook VWAP there was a good solid move for 3 or four candles.

So..partially based on the first DIA trade going so well and partially for another, unrelated, thing going my way that day, I entered the trade with a medium-heavy position. Even though it worked out, I think that was a mistake. This should have been a small position entry. But, it was one of those days. I was feeling good…top of the world stuff…so in I went.

It did play out as it did upon the last VWAP retake, and I was quickly Green & Gone. I knew I was too heavy in the position, but this victory added to my conviction that I was definitely a genius. I mean, I must be…what other explanation suffices? So, for this one it was 2.02 to 2.14 per contract for a 6% gain.

Two for two.

Then we come to the last trade of the day, the Great and Venerable SPY.

This one had it all. Let’s look at the chart below:

SPY had been bouncing around in the ORB channel for a couple hours. It had flirted with the put trigger, but it just didn’t get there. So, earlier I had set a price alert for when/if SPY breaks $477.20 and I went about my day, off the screens for a bit.

Around 12:26, that alert chimed and I moseyed back into the trading room.

Oof! Something was fiery. After staying pretty stable for a bit, SPY busted through the put trigger with massive volume. I was quickly in with my third relatively heavy position of the day with some ATM 1DTEs, and we were off.

You might notice that I activated the Heikin Ashi candles for this trade. See this resource for an explanation of Heikin Ashi candles however, I often use them when I want to see the larger trend unfold in a smoother representation. Sometimes HA candles keep me in winning trades longer, and sometimes they don’t. I go back and forth between HA and traditional candles, depending on the situation.

You can see the two ovals depicting my typical entry. I chose to exit this trade at the close of the first green candle. Trading HA candles have some different shades and colorations from traditional ones, for sure. That plus my larger-than-average position made me a bit quick on the sell trigger. And, of course you see the volume decreasing, so it turned out to be a solid exit. This story ends with these contracts going from 1.47 to 1.81 for a very nice 23% gain.

At this point, I was 3 for 3 and felt like I could do no wrong. I have learned to be conscious of that feeling and to quit trading when it ramps up. I don’t believe in “streaks” or “luck,” so after these three successful trades I was out for the day. The first two returned a good scalp profit, and the last was very good. When I was new to trading, I would often keep going after repeated wins and, inevitably, experience losses the same day, needlessly giving profit back to the market.

So, two takeaways for this lesson and then some homework.
1) Volume is king. You need to pay close attention to volume as a key data point informing your trades. Learn about it, study it, and use it to your advantage.
2) Be wary of euphoria. When you feel like you can’t lose, you are about to lose big. The ancient Greeks utilized death as a punishment for hubris. There’s probably a lesson there.

As for homework, I encourage you to go back to some charts of your recent trades that both won and lost. Look at the volume bars and see how the volume story was playing out. Was volume growing with price action, or was there a discrepancy? Did you pay enough attention to volume in your trade entry and exit? Think about volume as you move forward in your trading journey.

All hail King Volume, and have a great day.

And…I’ve got a new website. Check it at RenegadeQuest.com.
Class dismissed, and I’ll see you next time.
Follow River on Twitter at GreatRvr