Try Demo

5-DAY FREE TRIAL

TRADINGSIM DAY TRADING BLOG

Why Tradingsim?

Home Blog Day Trading Indicators 4 Simple Volume Trading Strategies

4 Simple Volume Trading Strategies

By Alton Hill

17

Why is Volume Important?

LOGIN

Volume

Volume analysis is the technique of assessing the health of a trend, based on volume

Searchthiswebsite

activity. Volume is one of the oldest day trading indicators in the market. I would
dare to say the volume indicator is the most popular indicator used by market
technicians as well. Trading platforms may not have a particular indicator; however, I
have yet to nda platform that does not have volume.

Most Popular

In addition to technicians, market fundamentalist also take notice to the number of

Best Moving Average for Day

Trading

shares traded for a given security.

Day Trading or Swing Trading

Bottom line, the volume indicator is one of the simplest methods for observing the
buying and selling activity ofa stock at key levels. The tricky part is volume can
provide conicting messages for the same setup. Your ability to assess what the
volume is telling you in conjunction with price action can be a deciding factor for your

First Hour Trading Strategies

How Much Can You Make Day
Trading
How to Find the Best Stocks

ability to turn a prot in the market.

In this article, we will cover how to assess the volume indicator to help us determine
the market's intentions across four common setups:
1. Breakouts
2. Trending Stocks

Categories
Candlesticks
Chart Patterns
Day Trading Basics

3. VolumeSpikes

Day Trading Indicators

4. False Breakouts

Day Trading Psychology

Strategy 1 - Breakouts and Volume

Traders will often look for breaks of support and resistance to enter positions. For
those fans of the Tradingsim blog, you know that I exclusively trade breakouts in the

Day Trading Software

Day Trading Strategies
Day Trading Videos
Glossary

morning of each session. There are two key components to conrm a breakout: (1)

Infographics

price and (2) volume. When stocks break critical levels without volume, you should

Investment Articles

consider the breakoutsuspect and prime for a reversal o the highs/lows.

Swing Trading

The below chart is of Netix on a5-minute time interval. You will notice that Netix
was up ~15% throughout the day after a signicant gap up. Can you tell me what
happened to Netix after the breakout of the early 2015 swing high?

Trading Strategies

Breakout of Swing High

The interesting thing about the Netix chart is that the stock never made a new high
after the rst 5-minute bar.

NFLX - Flat for the day

This is a prime example where a stock may have broken a high from a few weeks ago,
but is unable to break the high for the current day. As day traders, you want to wait
until the high of the day is broken with volume.
A key point for you is that every swing high does not need to exceed the previous
swing high with more volume. I used to obsess over this and if I didn't see more
volume I would walk away from the trade. Looking at the chart of Netix above, do
you honestly think the stock will exceed the rst 5-minute bar withincreased volume?

Of course not!
While this charting example did not include a break of the daily high, when you look
for stocks that are breaking highs, just look for heavy volume. Please don't beat
yourself upbecause the 9:35 bar had 150,000 shares traded and the break of the
high at 10:10 am only had 132,000.
Now if you see a break of a high with 50% or 70% less volume, this is another story.
Again, if we are within the margins, please do not beat yourself up over a few
thousand shares.
In a perfect world, the volume would expand on the breakout and allow you to eat
most of the gains on the impulsive move higher. Below is an example of this
scenario.

Valid Breakout

Let's test to see if you are picking up the concepts of breakouts with volume. Take a
look at the below chart without scrolling too far and tell me if the stock will continue
in the direction of the trend or reverse?

Breakdown or not?

Come on, don't cheat!

Breakdown

The answer to my question - you have no idea if the stock will have a valid breakout.
From the chart, you could see that the stock had nice down volume and only one
green candle before the breakdown took place. This is where experience and money
management come into play, because you have to take a chance on the trade.
You would have known you were in a winner once you saw the volume pickup on the
breakdown as illustrated in the chart and the price action began to break down with
ease.

For those that follow the blog, you know that I like to enter the position on a new
daily high with increased volume. You will need to place your stops slightly below the
high to ensure you are not caught in a trap. This strategy works for both long and
short positions. The key again, is looking for the expansion in volume prior to
entering the trade.

In Summary
1. The stock has volatile price action with the majority of the candle color mirroring
the direction of the primary trend (i.e. red candles for a breakdown and green
candles for a breakout).
2. On the breakout volume should pickup
3. The price action after the breakout should move swiftly in your favor

Strategy 2 - Trending Stocksand Volume

When a stock is moving higher in a stair-step approach, you will want to see volume
increase on each successive high and decrease on each pullback. The underlying
message is that there is more positive volume as the stock is moving higher, thus
conrming the health of the trend.
This sort of conrmation in the volume activity is usually a result of a stock in an
impulsive phase of a trend.

Volume Increase

The volume increase in the direction of the primary trend is something you will
generally see as stocks progress throughout the day. You will see the strong move
into the 10 am time frame, a consolidation period and then acceleration from noon
until the close.
For this strategy, you will want to wait for the trade to develop in the morningand
look to take a position after 11 am. For those that follow the blog, you know that I do
not trade in the afternoon; however, this doesn't mean you can't gure it out.

As the stock moves in your favor, you should continuously monitor the volume
activity to see if the move is in jeopardy of reversing. The speed of this setup is much
slower versus the other strategies discussed in this article; however, the diculty
reveals itself in the increased number of falsemoves, which are commonplace in the
afternoon.
Think I'm kidding about false breakouts, let me show you a couple.

Weak Trend 1

Weak Trend 2

These charts are just a sample of what happens far too often when it comes to
afternoon trading. So, how do you nd the stocks that will trend all day? After many
years of trading, I can tell you I honestly don't know.

In Summary
1. Look for volume to push the stock in the direction of the primary trend
2. You need to be prepared to hold a stock for multiple hours in order to reap the

real rewards
3. Once you gure out how to identify the stocks that will trend all day prior to 10
am, please shoot me an email
4. Instead of using volume to predict which stocks will trend, simply use volume as
an indicator that keeps you in a winning position

Strategy 3 - Volume Spikes

Volume spikes are often the result of news driven events. It occurs when there is an
increase of 500% or more in volume over the recent volume average. This volume
spike will often lead to sharp reversals, since the moves are unsustainable due to the
imbalance of supply and demand. Trading counter to volume spikes can be very
protable, but it requires enormous skill and mastery of volume analysis.
These volume spikes can also be an opportunity for you as a trader to take a counter
move position. You really need to know what you are doing if you are going to trade
volume spikes. The action is swift and you have to keep your stops tight, but if you
time it right, you can capture some nice gains.
Let's walk through a few volume spike examples, which resulted in a reversal o the
spike high or low.
In the below example we will coverthe stock Zulily. The stock had a signicant gap
up from $13.20 to almost $16.

Volume Spike Reversal

Notice how the stock never made a new high even though the volume and price
action was present. This is a key sign that the bears are in control. For this setup,
you will want to focus on the following key items:

In Summary
1. The high or low of the rst candle is not breached
2. The rst candle has signicant volume

3. The subsequent heavy volume events further establish the reversal in trend
from the initial spike at the open
4. Place your stops directly above the high or low of the rst candle

Volume Spikes with Long Wicks

The other setup with volume spikes are candlesticks with extremely long wicks. In
this scenario, stocks will often times retest the low or high of the spike. As a trader,
you can take a position in the direction ofthe primary trend, after the stock has had a
nice retreat from the initial volume and price spike.
Below is an example from a 5-minute chart of the stock Depomed, ticker DEPO. You
will notice how the stock had a signicant gap down and then recovered nicely. Once
the recovery began to at line and the volume dried up, you will want to establish a
short position.

Long Wick

Let's take another look at a long wick setup. The below chart is of Frontier
Communications, ticker FTR with a long wick down. The stock then recovered and
went at, which was an excellent time to enter a short position.

Another Long Wick

In Summary
1. Identify a high volume gap with a long candlestick on the rst bar
2. Wait for the stock to eat into the morning gap and volume to drop o
3. Take a position in the direction of the primary trend with a price target of the
low or high of the wick

Strategy 4 - Trading the Failed Breakout

I would be remiss if I didn't touch on the topic of failed breakouts. As a day trader
that specializes in early morning breakouts, I have my fair share of trades that just
don't work out. So, how do you know when a trade is failing? Simple answer - you
can see the warning signs in the volume.
Let's dig into the charts a bit.

False Breakout 1

Above is the chart of Amazon and you can see the stock attempted to breakout in the

rst hour of trading. Notice how the volume on the breakout attempt was less than
stellar. As a trader, you shouldn't be surprised when the stock begins to oat
sideways with no real purpose. While this would have been a bad trade, because
your money is idle, it's still much better than what I'm getting ready to show you next.

False Breakout 2

The above example of ESPR would drive me crazy 6 years ago. Notice how the
volume dries up as the stock attempts to make a lower low on the day. The key for
you as a trader to get out is the price action begins to chop sideways for a number of

candles. When you sit in a stock hoping things will go your way, you could just make
a donation to charity. At least the money will go to a worthy cause.

In Summary
1. Breakouts fail quite often
2. If the volume dries up on the breakout, look to get out within a few candles if
things don't turnaround
3. If you want to play the reversal, wait a few candles to see if the peak holds and
enter a trade counter to the morning gap
4. You can use the peakof the rst candlestick as a logical point to exit the trade

In Conclusion
The strategies discussed in this article can be used with any stock and on any time
frame. The most important point to remember isyou want to see volume expand in
the direction of your trade. Keep this in the back of your mind and you will do just
ne.

Lets Improve Your Trading Performance

Tradingsim accelerates the steep learning curve of becoming a consistently protable
trader by allowing you to replay the market as if you were trading live today, for any
day from the last 2 years its really a trading time machine.
To see how Tradingsim can help improve your bottom-line numbers, please visit our
homepage.

Bio

Twitter

Google+

Latest Posts

Alton Hill
I am the co-founder of Tradingsim.com and an IT professional that specializes in large scale
Systems Integration projects. I have actively traded the markets since 2000 and believe that
true trading mastery comes from practice. When I'm not working on a new trading strategy, I
enjoy spending time with my wife and kids.

Filed Under: Day Trading Indicators

Comments
hrandom says:
June 14, 2015 at 5:01 pm
HI, I dont know how to identify a stocks that will trend all day prior to 10 am, but I
would ask do you have any strategy to identify a stock that will trend all day prior to
12 am?

Alton Hill says:

June 15, 2015 at 7:30 pm

Havent come across anything solid. I use to labor over this, but have determined
that its better to focus on following your trading plan versus trying to predict the
big winners. The market is a living and breathing thing and there is truly no way
to know which stocks will run the hardest on a given day.

Essentials

Customer

Connect

Try Demo

Support

Facebook

Features

Login

Twitter

Privacy Policy

Sign Up

YouTube

Terms & Conditions

Contact Us

Google+
Blog

TradingSim
#1 MARKET REPLAY PLATFORM
22

18

Google+

All Content Copyright 2005-2016, MYSMP, LLC