The SECRETS of VOLUME TRADING

0:00 In today's video, you're going to learn many secrets and techniques of volume analysis and orderflow. This video is filled with actionable insights and things that other channels simply don't talk about. If you wish to support the channel, please click the like button, subscribe, comment, and share this video. Without further ado, let's begin by defining volume precisely and understanding its limitations and misconceptions about it. In simple terms, volume is a measure of market activity. The reason you should care about volume is that it helps contextualize price action. In other words, price action shows where buyers and sellers agreed in the past and where they are agreeing now and volume shows the intensity of this agreement. It's also important to understand that price

0:46 and volume are secondary information. We have information that generates the market which is called primary information and we have information generated by the market which is called secondary information. A piece of news that alters the perception of buyers and sellers is an example of primary information. It is information in its purest form so to speak. Price and volume are secondary meaning that they only reflect the real market. They are not the market itself like many retail traders believe. Another way of thinking about this is that primary information is input and secondary information is output. This output is used again as input in a feedback system by retail traders and certain types of

1:31 institutional traders. So secondary information also shapes the market but to a smaller degree in comparison to primary information. The two most important types of secondary information are price and volume especially for retail traders. Some would say that the two most important types are price and order flow, but order flow is simply a detailed breakdown of volume. So, we're talking about the same thing. Later, we'll see how classic volume analysis in combination with a change to electronic markets leads to modern orderflow analysis and a variety of incredibly useful trading tools. Given that volume is a very important type of information for traders, let's talk about its problems, limitations, and some misconceptions most traders have about

2:16 it. When it comes to volume, we have two main problems. The problem of dark volume and the problem of measuring real volume in decentralized markets such as the forex markets. The reason you should care about this is that these problems make retail traders question the validity of volume. But as you're about to see, this mistrust is grounded on a few misconceptions. Let's talk about the problem of dark volume. First, trading institutions want to hide their activity as much as possible because large orders draw the attention of other institutions in the order flow. If other institutions detect that one is trying to place a massive order, they assume this one institution has good information and they will try to take advantage of the movement as well which will in turn

3:02 diminish the edge of the institution placing the large order. There are two solutions to this problem of trying to hide orders. One of them occurs in lit pools and the other occurs in dark pools. A lit pool is simply a public exchange like the New York Stock Exchange, NASDAQ, CME, and so on. The order flow is public. In this environment, institutions that operate in the same time frames that retail traders operate. We'll use something called order splitting to hide their orders. Institutions can also use special types of orders, such as iceberg orders, but that's more for tiny time frames where retail traders cannot engage. If you want to know more about that, watch my video about institutional supply and demand. The other solution is to use what are called dark pools. These

3:50 are exchanges where the order flow is invisible to the public. Some of the famous dark pools are liquid and Goldman Sachs Sigma X. You may be wondering why an institution would go through the trouble of order splitting in lit pools if they could simply use dark pools instead. The reason is because liquidity in dark pools is limited and also regulatory agencies require that only a small portion of trades can be executed through dark pools to ensure transparency, integrity and fair access. Retail traders believe that most of the institutional volume happens through dark pools, but that's not true. In some regions like Europe, there are explicit caps that range between 4 and 8%. That means that between 92 and 96% of volume

4:37 must be traded in lit pools and therefore are visible to the whole market including retail traders. In summary, a part of volume is indeed dark but it's a small part of the total. So the problem of dark volume is not enough to render lit volume as an unreliable source of information. Let's now move on to the second problem which is measuring real volume in decentralized markets like forex. Equities and futures are traded in centralized exchanges like the New York Stock Exchange for example. This means the exchange has access to the entire markets volume and therefore can display it accurately. Foreign exchange markets are decentralized which means that trading is fragmented across interbank dealers, ECN, prime brokers and retail

5:24 brokers. This means that no single source contains the entire market's volume. Each venue only sees its own order flow. This dramatically increases information asymmetry since a large bank, for example, has a lot more data than a retail broker. The solution to this problem is to use tick volume, which is the number of price changes in a given period as a proxy for real volume. Tick volume has a very high correlation with real volume upwards of 90%. I will leave an article in the video description showing evidence of this high correlation. So in summary, there is dark volume, but it's only a small fraction of the total volume. And tick volume can indeed be used as a proxy for real volume since they have a very high correlation. In conclusion,

6:11 volume is not perfect just like price action is not perfect, but it's still very useful. With that said, let's move on to the secrets and techniques of classic volume analysis. The classical analysis of volume relies on two main principles that were outlined by Richard Wyov. the principle of cause and effect and the principle of effort and result. Let's begin with the principle of cause and effect. The principle of cause and effect simply states that the size of a trend is a function of the size of the preceding sideways market. For example, a small accumulation will result in a small uptrend. A large accumulation will result in a large uptrend. There is an idea of energy conservation in this principle. Think of a sideways market as

6:58 a charging battery. When the battery is full, the sideways market ends and the trend begins. As the trend advances, the energy stored is exhausted. The bigger the battery, the longer it takes to charge it and the longer it can exhaust energy. We can use volume to measure the batteries charge, metaphorically speaking. For example, here we have the S&P 1 hour time frame. And in this sideways market, we have a total volume of 3.3 million. In this next slide, we can see that the total volume of the subsequent trend is 3.32 million. In other words, using the principle of cause and effect, we can use the total volume to anticipate the end of a trend based on the sideways market that led to it. That's a volume trick that not a lot

7:45 of retail traders pay attention to, but it's a good one to have under your belt since anticipating the end of a trend is one of the greatest challenges of technical analysis. The second principle we need to learn is the principle of effort and result. In the Wiff method, effort relates to volume and result relates to price action. In theory, a certain amount of volume should result in a proportional amount of price action. But that's not always the case. Based on this idea, we have the detection of what is called volume validations and anomalies. Volume validation is when low volume produces small result in price or when high volume produces large result in price. Volume anomaly is when low volume produces large result in price or when

8:32 high volume produces small result in price. We can apply these two ideas of volume validation and anomaly in different levels of resolution from the smallest to the largest. We have volume spread analysis also called absolute volume analysis, relative volume analysis, intrastructural volume analysis and interstructural volume analysis. In addition to that, we also have the analysis of volume across support and resistance levels. Let's begin with volume spread analysis. Volume spread analysis is about analyzing individual candle range relative to the corresponding volume bar. We have four situations. Low volume and narrow range, low volume, wide range, high volume, narrow range,

9:18 and high volume and wide range. Before we go to the interpretations, we need a way to objectively define what is narrow, wide, low, and high. In this context, first related to high or low volume, what you can do is to plot Ballinger bands on top of the volume histogram by changing the source of calculation to volume like so. I also suggest you change the period to 50. You're also going to remove the lower standard deviation by going to the style tab and unchecking the boxes labeled lower and background. Volume below the moving average is considered low and volume above the standard deviation line is considered high. To determine the candle range as wide or narrow objectively, you will do a similar thing, but instead of using the volume histogram, you plot the Ballinger

10:05 bands on a modified version of the ATR. Plot the ATR and change the period to one. Now go to the style tab and change the style to columns. To use the Ballinger bands in the ATR, you plot it on your chart as you normally would and drag it to the ATR window. Change the source to ATR. Then go to the style tab and remove the lower standard deviation and background. The idea is the same as before. The ATR below the moving average means narrow candle range and the ATR above the standard deviation means wide range. In trading view, we also have a more organic way of visualizing price in total volume by using a different chart type called volume candles. In this type of chart, the candle width is proportional to its volume. So high

10:50 volume candles are thick and low volume candles are thin. This provides a more intuitive reading approach for a trader who is looking to use classic volume analysis. The classic interpretation goes like this. Low volume and narrow range. This is validation. Low volume should theoretically produce narrow range. It means there is lack of participation that is accurately being translated to price action. In strong trends, this is a sign of reversal. In weak trends, this is a sign of temporary rest. Low volume and wide range. This is an anomaly. Low volume is not supposed to create wide range. The classic interpretation dictates that this is a candle with low power. So, it's a sign

11:36 of reversal. But as we'll see later, the concept of liquidity changes this interpretation. High volume and narrow range. This is also an anomaly because high volume is supposed to create wide range. The interpretation is that there is a fierce imbalanced battle between buyers and sellers. One side is being absorbed by the other. High volume and wide range. This is validation. Effort is successfully being translated into result. This is considered a continuation signal because a strong movement is supported by proportional amounts of volume. The issue with volume spread analysis is that the location of candles relative to trends and support and resistance levels will alter these

12:21 interpretations and the geometry of candles also will. The ability to interpret the geometry of candles goes outside the scope of this video and goes directly into the heart of price action reading. If you're interested in that, I have a course called Fractal Trading, Mastering Price Action and Beyond. I'll leave the link in the description. Volume spread analysis relates to individual candles and their corresponding volume. The next step is to consider the changes that occur from one candle to the next both in price and in volume. This gives rise to relative volume analysis and more subtle perceptions of validation and anomalies. Let's analyze some possible scenarios keeping in mind the relationship between effort and results. In VSA, we needed

13:08 the help of Ballinger bands and ATR to know whether price and volume are narrow, wide, low or high. With relative volume analysis, this is not necessary since what matters is the change in volume and range from one candle to the next. For example, imagine that we have two candles and volume bars like this. We observe a 100% increase in range with a 100% increase in volume. This is one example of validation. the result increased proportionally to the increase in effort. Now imagine that we have a change of 130% in effort with a change of 100% in result. This is a subtle type of anomaly that would not be perceived by a trader who only knows VSA. The reason is because effort is not

13:55 being fully translated into results. For a VSA trader, this is just a high volume wide range candle, a sign of continuation. For a trader using relative volume analysis, this is an early indication that price is losing power and some buyers are being absorbed in this case. Here's another example. On the left, we have no discrepancy of change in price and volume. So, this is validation. On the right, we see no change in result, but a decrease in an effort. For a VSA trader, the second candle is still high volume and wide range. If we look at relative volume, we see the opposite signal. There is less volume behind price. So the movement is weakening rather than strengthening. There are many more examples of validations and

14:42 anomalies in relative volume analysis. But the point here is that absolute and relative volume analysis can yield contradictory results. And the validations and anomalies of relative volume analysis are much more subtle than VSA. If we decrease the level of resolution a little more, we get to what is called intrastructural volume analysis. This is the analysis of whether volume is rising or falling along a price movement, meaning from a high to a low or from a low to a high. The general interpretation is that rising volume validates both rising and falling price movements and falling volume invalidates both rising and falling price movement. This can be a little confusing because some traders have the impression that volume should decrease to confirm a down movement.

15:28 That's not how it works. Rising volume validates price regardless of direction and falling volume invalidates price regardless of direction. This is useful in the context of a trend. For example, if we are in an uptrend, we want the upward price movements to be accompanied by rising volume and the retracements to be accompanied by falling volume. If we detect upward price movements with falling volume, this is an early indication that the trend will reverse. In the subsequent price action, we see downward movements accompanied by increasing volume and upward price movements accompanied by falling volume, which is characteristic of a downtrend. The point here is to demonstrate how volume can lead price action. Decreasing resolution one step further,

16:15 we have interstructural volume analysis, which is about the relationship between price extremes and the corresponding volume action. Once again, thinking in terms of an uptrend, the successive higher highs should have higher peaks in volume in order to be confirmed. When a higher high produces a lower peak in volume, we have volume divergence and the idea that the trend is slowing down, meaning that price is now being sustained by the sufficient amount of volume. The opposite is also a type of divergence. If price forms a lower high and volume creates a higher peak, something is preventing effort to be accurately translated into result. sellers are absorbing buyers. Classic volume analysis can also be useful to assess the power of support and resistance levels. This is once

17:02 again derived from the idea that rising volume validates price and falling volume invalidates it. The idea here is to observe how price and volume behave when approaching and when leaving a support or resistance level. If you understood the relationship between effort and results, all of this should be intuitive to you at this point. Let's take a look at the possible scenarios of price approaching a resistance level. In this first example, we see rising volume as price approaches the resistance, but then price respects it and volume continues to rise. This validates the strength of the resistance because sellers have more volume than buyers. In the second case, we see buyers lose steam as they approach the resistance, but sellers respond even

17:49 less. resistance is more likely to create just a bounce to the downside and then continue upwards. In the third example, we see buyers gaining power as they approach the resistance and sellers creating a movement down with the lack of power. Resistance is likely to get broken to the upside right after. In the fourth case, we see buyers losing power and sellers gaining power after price reaches the resistance. This is the strongest confirmation of the resistance level. In the last case, we see flat volume across all movements. Flat volume doesn't validate nor invalidates price movement. So, this resistance level is ambiguous. Another common technique in classic volume analysis is the observation of

18:35 extremely high or extremely low volume. Both signal a reversal, but for different reasons. Extremely high volume indicates an exhaustion of power. It's the final blow in a trend. Extremely low volume indicates lack of interest and therefore the trend might also reverse. For example, in this chart, we can see that a volume bar above three standard deviations mark the end of an uptrend. This volume bar is clearly an outlier in this case. In this other example, we can see that extremely low volume can also lead to a reversal. Volume way below the moving average of volume indicates lack of interest which can lead to a reversal. Notice that both extremely high and extremely low volume can lead to a reversal but for different reasons.

19:23 In the former market activity peaks to finalize the trend and in the latter market activity loses its steam also leading to a reversal. This covers most of the classic volume trading techniques. Let's now move on to why we need a new framework of analysis. Throughout most of the 20th century, iconic traders such as Richard Woff and Jesse Livermore used price and volume to make fortunes. But we have to remember that in those days, the markets were not electronic. From the 1980s on, the transition to electronic markets began and this changed the context in which volume can be used as analytical tool. There are three important things about this. Number one is that classic volume

20:08 analysis relates to total volume. The classic volume analysis tools such as the volume histogram only account for total volume. However, in each candle, we always have buying volume and selling volume. When we break down total volume into buying and selling volume and we pay attention to the difference between them called delta, we can gain superior insight into what in fact happened in that candle. We'll explore more of that when we talk about orderflow tools. Number two is that classic volume analysis ignores the other dimensions of the market. To truly understand the market, we cannot focus only on price, time, and volume. The market also has other dimensions we need to consider such as value, momentum, volatility, and

20:54 liquidity. This is precisely where theories such as auction market theory and modern orderflow tools enter the scene. These other market dimensions change the interpretation of classic volume tools especially when we talk about value and liquidity. The third problem is that modern electronic markets led to advanced liquidity engineering. We now have electronic market makers and highfrequency trading firms which can engineer liquidity and manipulate the order flow in ways that were unimageable to someone like Dao Woff and Liverour. With that said, the way manipulations occur in the macro scale and the incentives behind them remain the same. That means that the old manipulation patterns are still true. They just exist

21:41 in a different context. To make a simple analogy, nowadays we can play chess online, for example. But that did not change the rules of chess. It just changed the context in which it is played. Does that mean the classic volume techniques don't work anymore? Not exactly. This leads us to a paradox. If obsolete trading techniques are deeply infused into technical analysis culture, they become true to a certain extent due to the self-fulfilling prophecy effect. In trading, it's not just about the techniques. It's also about knowing how other traders will react to the techniques even if they don't make any sense. Let's now move on to a brief description of the seven market dimensions. If we want to have a more accurate and

22:27 realistic way of trading the market, we need to face its complexity without trying to make oversimplifications. This means we need to consider all the dimensions that affect the market. They are price, time, volume, value, momentum, volatility, and liquidity. Price is always following value and value is shaped by information. We must remember that the financial markets are nothing more than an information discounting machine. It's a mechanism that is used to discover the fair price of an asset which is something that can only be achieved by the collective actions of all market participants. It cannot be done by any individual or algorithm. Time is simply the stage where all dimensions unfold. There is no dynamics

23:13 without time. Time can be used as a proxy to perceive value like we see in a market profile approach. For example, the longer price action stays at a certain level, the more this level is perceived as fair value by the market. Volume is an indication of activity or intensity of consensus and it can also be used as a proxy for value. Price levels that contain more volume represent fair value. Generally speaking, this is where the tool called volume profile enters the scene. Momentum in physics is the quantity of movement. In trading, we can see momentum as the inertia of price action. A strong trend doesn't end abruptly most of the time. It's like a heavy cargo ship. It takes time to turn because it

23:59 has a lot of momentum. Volatility is the variability of price over time and it can be used as a proxy for uncertainty and entropy. Liquidity can be seen as the friction of price discovery. Just like in physics, friction moderates movement, in markets, liquidity moderates volatility. Nowadays, there is an overemphasis on liquidity. But as you can see, all the other dimensions of the market are equally important. To unify all the market dimensions, we can think about a simple analogy. If you imagine the price action is a car, then value is the destination. Volume is the fuel, time is the dynamics, momentum is the inertia, volatility is the handling, which is how aggressively the car

24:45 corners, and liquidity is the road inclination. A deeper exploration of how the dimensions interact with one another requires a whole course. So, we'll leave it at that. When we add for example the layer of liquidity into the classic volume trading tools, the standard interpretations can change. The classic interpretation of the low volume wide range pattern for example is that there is no power behind the candle and therefore it is a sign of reversal. However, if you understand how liquidity facilitates price movement, it makes sense for a low volume candle to have wide range. A low volume and wide range candle in a low liquidity environment means there is lack of opposition, not lack of power behind the candle. The

25:31 point here is once again that these inconsistencies emerge when we ignore the dimensions beyond price, time and volume. This leads us to a necessary paradigm shift. Instead of looking just at volume, we need a more granular view of market activity on top of the awareness of the other market dimensions. This is where order flow emerges. You can view orderflow as a detailed breakdown of volume that is in tune with the modern electronic trading environment. Let's now make a brief overview of the best orderflow tools a retail trader can use. They are the volume profile, volume footprint, cumulative volume delta, and the anchored VWAP. There are many more orderflow tools out there, but these are the ones that tend to be the most effective while being relatively simple.

26:19 If you want more information on why that's the case, please watch my free orderflow course here in the channel. Let's begin with the volume profile. The volume profile shows volume at price. This means that it will provide a horizontal histogram showing the volume traded across a chosen price range. The reason this is useful is because volume is correlated with the dimension of value and value is like the invisible force that is always pulling price action. So if you know where value is, you know where price is going. High volume means that the market perceives that price region as fair value. These regions work as attractors. Low volume means that the market perceives that region as unfair value. These regions work as repellers.

27:05 For example, if we plot a volume profile in this upward price movement, we'll be able to see the distribution of volume at price. The blue lines highlight the area where 40% of the total volume occurred which is called value area. And this red line shows the point of control which is the price level with the highest volume across the whole profile. By extending this high volume to the right, we highlight a price attractor that can work as a demand zone. In this case, a few candles later, we see price coming back to this region. And as it approaches the point of control, we see more prominent lower shadows alluding to higher degrees of buying pressure beginning to emerge. Right after that, we see price ticking off to the upside. The whole point of the volume profile is to see the past

27:51 regions of fair and unfair value that cannot be seen through price action alone with total precision. Notice how the volume profile can be used to confirm standard demand zones. Next in line, we have the volume footprint. The footprint shows the distribution of volume within a candlestick and it also shows where imbalances occur in the delta. By analyzing the location of price relative to the imbalances, we have the initiation and absorption signals that cannot be seen using price action alone. If you want to know how that works in greater detail, check out my free orderflow course. In today's video, I'm going to demonstrate one of the greatest features of the footprint in my opinion, which is the stacked imbalance. The stacked imbalance happens when

28:37 imbalances happen in consecutive price levels. It's a stronger signal relative to the single imbalance. You can view the stacked imbalance as a localized area of unfair value or price discovery. For example, here we see price resuming to the upside after breaking a previous low. New traders will call that a liquidity inducement because they think price follows liquidity. However, if we access the footprint chart, we'll see that price is reacting to a large stacked imbalance in the ask as it is highlighted in green. You cannot see that just by looking at candles. You need the footprint. Notice also the precision. As soon as price enters this tacked imbalance region, it reverses. The next tool is the cumulative volume

29:23 delta. The volume delta is the difference between bid and ask volume. By observing the accumulation of delta over time, we have signals of exhaustion and absorption, both of which lead to reversals, but for different reasons. In this illustration, you can see the exhaustion and absorption patterns for quick reference. This is interesting because we can see reversal signals that cannot be seen in momentum divergence, for example. Beyond that, we can use the CVD to confirm the momentum divergence signals as well. For example, let's think about this logically. Here we have a price chart with CVD below it. Notice that the last significant low surpassed the previous one by a little, but if we look at the CVD, we'll see that there wasn't selling volume to justify that

30:10 movement. In other words, this is a selling exhaustion and it leads to an upward price movement right next due to the lack of selling volume. This would be a way of adding confluence to the double bottom we see in the price chart for example. The final order flow too is the anchored VWAP. The anchored VWAP is the anchored volume weighted average price. This dynamic level is used by institutional traders as a benchmark of execution. Meaning that executing long trades below the VWAP or short trades above the VWAP is advantageous. You can see the VWAP as a dynamic supply and demand level that cannot be seen in any other way. It embeds price, time and volume in a unique way. For example, in

30:55 this chart, we can see the main pullbacks in this uptrend. Determining these levels is a critical skill for any trader and the anchored VWAP can help tremendously with that. If we plot the VWAP on the lowest low and change the calculation to low, so it starts at the very tip of the swing, we'll see how price ends the significant pullbacks when it meets the VWAP line. That is a great way of adding confluence to your trades. There's a lot more to order flow than what I'm talking about here. If you want to take a deep dive into it, please check out my premium course called Advanced Orderflow Trading. There you'll learn the connection between advanced order flow, fractal trading, much more from the ground up. And you'll learn many different cutting edge trading techniques based on solid principles. In

31:41 fact, I offer a whole range of advanced trading courses with many different scientific principles and precise trading techniques. If you want to sharpen your skills, you can learn more about them in my website fractlflowpro.com or by sending me an email at [email protected]. If you enjoyed this video, please help support the channel by clicking the like button, subscribing to the channel, activating the notifications, leaving a comment, and sharing the video with your trading community. Thank you very much for watching, and I hope to see you in the next videos. Take care.