The duality in volume analysis

This article is intended for those who are new to volume analysis and may interpret market situations in a simplified way due to their lack of experience. Beginners can make the following mistake: “A big buy on the chart → a large player is bullish → I am also going to buy.” Read more:

The duality problem

At the beginning of studying volume analysis, a trader learns:

• what bids, asks, and spreads are;
• what delta is;
• what types of orders exist.

Beginners often have the illusion that making trading decisions is quite simple – just spot a large positive delta on the chart, which indicates a big player, and follow their buying logic. But it is not that simple. Having noticed large volumes, you need to ask yourself basic questions:

• Is it buying or selling?
• Whose buying or selling is it – professional traders or retail buyers? What motivates their decisions?

For example, let’s consider a simplified cycle that occurs repeatedly on any exchange, whether for stocks, cryptocurrencies, or any other asset.

Trend diagram

Below is a diagram of a bullish trend (the opposite is true for a bearish one).

The arrow above shows the price increase, the numbers indicate:

Numbers indicate: 

In trading, you constantly face different dilemmas: 

• the price can go up or down;
• the price can move on high and low volumes;
• volumes can represent buys and sells;
• buying and selling can represent totally different motives for professional traders and the mass of retail traders.

The solution to the problem of duality in volume analysis is not to focus specifically on single prints but to form your own judgment based on the larger picture. When analyzing large volumes, consider the context of their appearance. As Tom Williams, creator of the VSA, said: “It can be either a polar bear in the Arctic or a polar bear in Africa.” If you want to gain a better understanding of how to use VSA for footprint analysis, check out this series of articles:

• The end of a rising market and bag-holding patterns
• No demand and no supply patterns
• Buying and selling climax patterns
• Shakeout & upthrust patterns
• Accumulations and distributions

The examples below will give a better understanding of how to analyze high volumes in the general context of the market.

Volume analysis examples

Example 1

This is a timeline of one bullish day from the euro futures market. This is a footprint showing horizontal volumes inside each 5-minute candle. The delta indicator has also been added to the chart.

The chart reflects the trend diagram described at the beginning of the article. Numbers indicate:

To summarize briefly:

The chart shows a bullish reversal in fall 2022:

1. There was a downtrend in 2022 amid rising inflation, Fed tightening policy, and concerns about a recession.
2. A spike in positive delta indicates market buys. A hypothetical large player may have decided that the price had fallen enough (to the 3,700 level) to become attractive for accumulating a long position. Notice how bearish progress is slowing down.
3. Another spike in buys occurred. However, those who had opened long positions in anticipation of a reversal acted hastily (this will be apparent in retrospect). The downtrend, which lasted for more than half a year, could not reverse so quickly. The price dropped from VAH to POC. Probably, a large player continued to form long positions.
4. On October 12, amid an important news release, the price dropped below the VAL level. Sells that occurred at a minimum are likely to reflect the panic of retail traders (while a large player took advantage of this situation and bought from them, thereby completing the formation of a long position). Then the price rose to the POC level, and the session closed at the highs. Trading volumes were record-breaking, and the price dynamics indicated strong demand.
5. The next day, the bears attempted to break through the VAL level, but their efforts were in vain, as the subsequent days revealed. It is worth noting the concentration of selling pressure in the market.
6. A spike in positive delta indicates the efforts of a large buyer to break through the VAH level in order to push prices higher and establish an upward trend.
7. Given the positive fundamental factors, the trader manages to achieve this – pullbacks to rising lows are holding at around the 50% level.

The article does not raise issues of risk control and money management. But that does not mean they can be ignored. Do not let a wrong decision lead to irreparable losses – no trader can be right 100% of the time.

Conclusions

Believing that volume analysis is the key to making money on the exchange easily and quickly is a mistake and can lead to falling victim to an illusion. A trader who studies trading volumes using footprint charts, etc., increases the amount of important information available for analysis. But at the same time, the number of options for its interpretation also increases due to numerous probabilities:

• the price can go up or down;
• the price can move on high and low volumes;
• volumes can represent buys and sells;
• buying and selling can represent totally different motives for professional traders and the mass of retail traders.

To draw more accurate conclusions when analyzing volumes, we recommend not focusing on individual patterns but always keeping in mind the overall picture of the market. It is also useful to practice volume interpretation skills using the Market Replay functionality available in the ATAS platform. Download Free Trial ATAS. It is free. During the free trial, you will get full access to the platform’s instruments and will be able to appreciate all their benefits in order to make a purchase decision. Moreover, you will be able to continue using the program even after the 14-day trial period is over, but only for cryptocurrency trading. The ATAS platform:

• allows you to download tick history from the futures, stocks and crypto markets so that you can get a detailed picture of the market;
• offers many benefits for traders who want to combine bounce trading with easy-to-use cluster charts and useful indicators.

Do not miss the next article in our blog. Subscribe to our YouTube channel, and follow us on Facebook, Instagram or Telegram, where we publish the latest ATAS news.