Volume Price Level Trading

Volume Price Level Trading

Volume is a popular tool among traders, but most look at volume over time. When you plot volume against price scale, then a completely different picture emerges. There are prices that have a large amount of volume and prices that have much less volume.

Volume Price Level Trading is not new, in fact it is as old as futures trading or even the stock market itself, long before computers existed and the only ticker..well...was a ticker tape of price and volume. Many argue in Forex that volume is a meaningless indicator because it only indicates a broker's volume. There are two problems with that argument. The first is that why indicators even work, is that they extrapolate historic price data and then traders use this information to make trades which affect price action. Second, volume is not an indicator.

Volume typically leads price and is the only tool that doesn't extrapolate historical numbers (i.e. what the market did) to determiene a result. Volume is price action. The effect on price is that high volume tends to be attracted or work within a price range around a price level. High volume is high market interest in a price level, low volume is low market interest in a price level.

The market mans that for every buyer there is a seller. Forex is not random price moves. Price moves because someone is selling and someone is buying at a price. The more popular a price for buyers and sellers, the more volume.

Volume in Forex is a broker's tick volume data from it's own database. This means that volume is a record of every trade, 1 trade, 1 volume. Volume is not the quantity traded. The reality of Forex is that everyone sees the same price, everyone uses the same indicators and why volume works across brokers is that the market makes the same decisions, regardless of which broker they use. The end result, is that at each price level the volume increase or decrease is relatively the same at any broker because the market interest is the same at each price level. This has been proven time and time again, by traders using multiple brokers, comparing brokers, by using multiple broker feeds, and so on. Volumes will not be exactly the same, but their relative movement to price will be the same.

A price level is like a magnet, price candles are iron bars attracted to the magnet, and volume is the magnet's strength. The stronger the price level, the more attracted price is to it. Price will bounce around a strong price level and be difficult to move off the price level. Try to move an iron bar that is attached to a magnet...very hard to move, but once the iron bar moves away from the magnet, it is a lot easier to move.

When a price level is weak, there is nothing to hold price at a fixed level and prices can move more aggressively and quicker. Iron bars will easily pass by weak magnets, but when they hit a strong magnet they will stick.

Trades in the market are largely pre-determined. There is a price level where buyers and sellers will gather. This means that if you watch price and volume, you are not looking at what has happend in the past, you are looking at where the market is headed. Once you find a strong price level, you can trade to and from that price level knowing that price will be attracted back to that price level.

Volume Price Level trading is not a system in a traditional sense. It is reading the markets. However, many moves with price/volume are repetitive and predicatable. What can never be forgotton is that we trade price levels, we are looking to where price is most attracted too.

This is a MT4 chart with volume indicator added on the M15 time frame. You will notice I have made the volume chart one colour as I think seeing different colours for the rise and fall in volume only confuses matters. I've also added a level line on the volume indicator at 500. This is an arbitray line I use just for reference to ignore the volume noise below this line. If trading on M30, I use level 750 and on H1 it is level 1000, in case you are wondering.

So let's read this chart from December 31, 2012. As you can see at around 8:45 am there was a huge spike in price upwards, a leveling off and then a sharp down turn at 10:45 am and then another climb right afetr that to the end of the chart.
So, from this chart we could have easily taken advantage of the downturn and the following rise simply by establishing price level lines from the data staring at us.

Let's focus on 8:45 am. This is where we see a huge spike in volume, which means that price crossed a line that "triggered" a large amount long trades. This we will call the "Volume Trigger". The "Volume Trigger" is created at the close of the candle, we never make decisions midway through a candle.

Determining the price that caused this "Volume Trigger" is the tricky part. Volumes are fairly level prior to this "Volume Trigger" at 8:45 am and as such I put the price line above the opens and closes of candles previous. I looked back to 3:15 am where the volume made a small peak. We can see where I drew the "Price Level Line at Trigger" and we can see how the volume from 3:15 to 8:45 reacts to this line. I will write more about this later as it is very intuitive for me to see the "Price Level Line at Trigger" but there is a very analytical approach to this that can be used to establish this line. I also look for simple prices that are ending on "5" or "0", in this case at 1.3195 -- we'll never be exact and it is good practice that we typically use the "5" and "0" price levels when setting a price level.

So at this point we know have established that their is a price level line at 1.3195 and this has triggered a buying spree in the market.
From 9:00 to 9:30 we can see that volumes have declined and the price has pretty much maxed out at the top of the chart. So after the 9:30 candle closes, I put my sell order in at the 1.3222 and waited for my order to go through, which it did. My stop is at 1.3230, a little higher than the highest price reached since the "Volume Trigger".

My exit target is simply at 1.3195 where the "Price Level Line at Trigger" is set. This is a simple set the trade and forget with my broker. However, better strategies to maximize the trade and exit by volumes and price do exist for in the moment trading.

If you paid attention you can see my error where I set the "Price Level Line at Trigger". I set it at 1.3222 and at 10:45/11:00 we have proof by the volume spikes that the real price level is at 1.3220. Notice my error? I should have stuck to the "0" price level at 1.3220 and not 1.3222. In this instance it did not hurt me, but trade opportunities can be missed by a simple mistake like this - small as it may seem.

Also at 11:00 we have a new trigger and price level line to establish for a long trade. The safe level is at 1.3185 or 1.3190. I'll let you ponder that for now and see if you can figure out why that's a safe entry point for a long trade. And where would you exit?

It looks so arbitrary and simple doesn't it? It is and it isn't. Obviously establishing the correct price level line is the challenge and my hope in this forum is to show you how to dtermine that price level line; not just by instinct but with some logic and analysis so there is no emotion or second guessing in your trading and that you are making pips all the time...and not hitting those dreaded stops!

I am with you on this

Subscribed. Thanks for sharing Spudfyre and happy new year to you.

Subscribed. Is this the standard level for all other pairs besides EURUSD?

It is an interesting concept you have there, but I was just wondering how do you know that price has maxed out and is about to go back to the initial price level line at trigger. Could the price just not consolidate and shoot up again? Do you look at specific price action to determine that price will reverse or is it just what price usually does after such volume rise ? Anyways, thanks for sharing, looking forward to see how this thread will develop

I will talk about it more but basically you just want to set your volume indicator level line to mentally block the volume that isn't of interest, i.e. it is too low and numerous to give any indication.

It certainly can happen and that's were some other tools come in handy, like my post on older Escalator to Pips forum that uses multi-time frame stochastics so we know where we are in the trend.

Even at that, I'm fundamentally not a risk taker, so stops that are hit, don't pull me down overall too far. When we are fluctuating near a price level, that duplicity of a long indicator triggering another long indicator will hit our stop. This is much of the longer thread, so keep watching...we'll definitely dive into this issue.

Hey Spud,

Nice to see you around and active again. I've actually always been curious about the proper utilization of the volume indicator because I have heard that many of the professionals always talk about it especially in a lot of articles and such that I read but I've never actually figured a value added way to utilize it. So, with that said I'm definitely tuned in as I know you will have some innovative and interesting stuff to offer here and I'm always open to learning something new.

Trading and Some Pitfalls

There are definitely some pitfalls to watch out for and knowing these and measuring our risk/reward will go a long way in keeping us profitable.

Let's look at the next chart and our "Volume Trigger", you can see the volume before this was almost non-existent and relative to that on Dec 30 18:00 we see a peak. This is definitely a cautionary trade with volumes this low overall for an extended period and our peak just rising above 500, but it's a good lead into a pitfall so we'll use it.

You can see if we set our price level at the trigger at 1.3205 (remember the "5" and "0" rule) that 1.3205 seems too low and out of place...really stretching the low limit of price. Using a "Price Level Line at Trigger" of 1.3210 match are volume chart and price history much better.
Price jumps up and we see volume die off 3 candle periods after our trigger. So now we set our sell order at 1.3230 and our stop at 1.3235. You can see how we came to the determine the stop line? 1.3230 is above all the previous high prices on this chart (except one candle), it ends in a "5" (5,0 rule) and it is close enough to our sell order that if we hit our stop we really won't get hurt. So risk to profit ratio looks pretty good with our exit being 1.3210.

Now, let's look at the pitfall looming ahead. We just made a great short trade and we get another trigger on Dec 30 21:45, coincidentally the same candle our exit was hit on the previous trade.

We can see that our price doesn't rise very high and the volume drops after the trigger. Our "Price Level Line After Trigger" will be the same as our "Price Level Line at Trigger" of 1.3210. Why? We can see the volumes have dropped 3 candles after the trigger and we have seen no significant long price move. If we put the price level after the trigger at 1.3215 there is no previous price level reached in previous candles that support it.

Now the pitfall. If we set our short order at 1.3210 this we know is a trigger value for longs, so extremely risky. Our stop could find a place at 1.3220, Personally, I don't like it but a case could be made for it, certainly no lower. Our exit in this case will run purely on a volume trigger. That's 3 red flags for a risky trade and we should avoid it. Better to sit and watch and wait until overall volumes are better.

A riskier trader might take their earnings from the previous trade and set their stop at that level...so at worse they break even. Short order at 1.3210 and exit on the volume trigger that eventually comes at 23:45...it's a great trade in the end. However, that volume trigger could have been to move the price in the opposite direction...so watch out for this pitfall.

We'll definitely revisit many trades similar to this and as a holistic trading strategy examine the pros/cons of entering these type of trades and how to stack the odds in our favour better.

ke them

your explanations are not clear. very confusing. not sure what the exact rules are. it would be helpful to just summarise the rules.

I promise I will summarize the rules and guidelines after I introduce the topic. Volumes and Price Levels are powerful when used together and consider the introduction the safety course. I want people to trade successfully and know why they are making their decisions.

If I'm unclear and you would like a better explanation in anything I write please let me know what and I will definitely look to rewrite and make it easier to understand. It's just the beginning and a new and difficult topic to write about, so I am no doubt going to have some clarity challenges ahead of me.

Hi spudfyre, great thread. At this moment I´m volume trading fan.
Suscribed and waiting for more

hi spudfyre , thank you for this thread and i just want to see if got it right here an exemple on eur/usd we had a volume spike at 1:30 am so price level line at trigger is 1.3265 and price level line after trigger is at 1.3285 so we will short from 1.3285 with stop at 1.3295 targeting price level line at trigger http://i.imgur.com/b7cmc.png

Yes, the overall concept is correct. I might differ with you on price levels. I'd prefer at price level at trigger of 1.3260, just because we saw no volume for the price to drive below 1.3255 just previously (around 23:00). I'd like a stop at 1.3300, I think it is less likely to get hit...1.3295 might get tested or just touched. I like the 1.3285 entry, making the risk ratio good(lose 15:gain 25) -- the risk ratio allowed me to set the stop higher and a stronger reason go with a higher stop.

Just a point - I'd double up my short order right after the 3:00 candle...notice the spike in volume and the lack of response in price. That's another trigger but our price levels would not change and we'd be looking at the same trade entry/exit. It's just a bonus we should take advantage of.

You spotted a great trade!

I like volume and I have it on my charts always however my trading decisions are not based on them.Challenging part is volume increase is simultaneous with pa and by the time you "see" volume increase move is done.
Furthermore just because volume peaked and temporarily decreased does not mean there is no second wave coming in same direction of original spike.
Anyway I am always open to learn.
Regards

Subscribed, even if the whole concept it is unclear, but sounds interesting. Please explain a little bit more in detail how do you determine the price level line after trigger.
Good luck with your thread. Thank you for your effort to share.