Part 2 of the Better Volume indicator article today. In the last post I described how the typical volume histogram can be improved by coloring bars based on 5 criteria:
- High volume churn
- Low volume churn
- Climax volume
- Climax volume plus High volume churn
- Low volume
In that article, Climax Volume examples were discussed and the “Trampoline” volume indicator signal described. This article describes high and low Volume Churn examples. Volume Churn is simply the bar’s volume divided by the bar’s high to low range. High and low values are identified by comparing values in the last 20 bars.
Volume Indicator: High Volume Churn
High Volume Churn shows that as additional trading volume enters the market, less upward or downward market progress is made. In the case of an upward move, the additional volume is being absorbed by more traders willing to sell, leading to the market beginning to stall and eventually turning.
Daily Emini bars are shown on the chart below with High Volume Churn highlighted with red paint bars and green volume bars.
Better Volume Indicator (Daily Emini)
As you can see, High Volume Churn bars frequently occur before market turning points or at pauses mid way through a strong trend move. A word of caution with intra-day charts. High Volume Churn often appears on the last bar of the trading day. This does not necessarily represent a possible turning point, but is more likely just to be high volume from day traders closing out positions.
Volume Indicator: Low Volume Churn
Low Volume Churn shows that relatively little volume was needed to generate a large range bar. Using the example of an uptrend, what I think is happening is this. As the market rises strongly, traders start chasing prices higher. Some will buy at market, others place resting buy orders. As the move gathers momentum the buy orders will be progressively pulled up, until there is a long “tail” of resting buy orders. However, the volume at each price point within the “tail” will be relatively small.
Now for a large trader to take profits or a short trade quickly, he will have to go quite far down the “tail” to get his volume filled. The result will be a large range bar down (in this case) and Low Volume Churn. The relatively large counter-trend move can be enough to spark more profit-taking or the start of a downswing. I’m sure this is part of the large trader’s plan.
Better Volume Indicator (233 Tick Emini)
233 Tick Emini bars are shown on the chart above with Low Volume Churn highlighted with white paint bars and white volume bars. As you can see, Low Volume Churn bars frequently occur at the beginning of counter-trend moves.
Good luck with your Emini trading.