As a long-time e-mini trader, I believe that volume is one of the most neglected variables in trading. Of course, the average trader doesn’t have a great deal of trading volume information at their disposal because volume has been misunderstood or completely ignored for so long. My opinion is that increasing your understanding of volume and its relationship to other trading variables can greatly improve your e-mini trading results.
Richard Arm’s book on equivolume is a wonderful place to start your study of volume. My paperback copy of one of the older editions of the book is worn and worn because I have read and reread the volume. Mr. Arms is an interesting guy and, on first reading, it’s difficult to fully understand the principles of volume (in relation to price) that he explains. It is only by rereading and learning the material that you can finally understand what he is trying to illustrate; It took him even longer to watch his ideas at work on a live trading chart, but it can be done.
Furthermore, there is a fundamental difference between trading stocks, which was Mr. Arm’s main study tool, and relating those ideas to electronic trading.
Why would stock trading volume principles vary from e-mini’s trading volume implementation?
It is important to remember that the New York Stock Exchange is populated with market makers who provide an endless supply of shares at a given value for all traders to buy or sell. On the other hand, trading on the CBOT’s Chicago Mercantile Exchange (or any other futures exchange, for that matter) involves working in a zero-sum market environment. A zero-sum market is defined as a market where there is a buyer and a seller for each contract. Of course, you as a trader no longer know who is the buyer or seller corollary of the contract you are trading; the function of the exchange is to unite potential buyers and sellers anonymously. As a trader, you simply know that you have either completed a contract or you have not completed a contract.
You will find this simple axiom helpful in e-mini trading in zero-sum markets: As price action approaches a support or resistance (SAR) area, you need to pay close attention to the volume level to determine if the price is going to continue through support or resistance. Generally speaking, when the volume increases sharply at the SAR point, it is often an indication that the price is not going to break through the line in question; Conversely, low volume at a SAR point is an indication that price will continue through the SAR.
Why?
As I mentioned earlier in this essay, futures trading is a zero sum game and there are a finite number of contracts in play during normal market action. As the price approaches support or resistance, many traders will exit their positions; generally with the idea that the price is going to change direction. On the other hand, a new group, or existing traders, will start to buy or sell (depending on whether we are talking about support or resistance) contracts in anticipation of the change in market price direction. In short, this phenomenon can be described as a two-seat game of musical chairs, with long and short e-mini traders swapping positions at potential turnaround points to match their expectations of future price movement.
What is the evidence that you can easily observe to confirm that this process is taking place?
As the process of e-mini traders exiting positions and new traders entering positions takes place, the result will be an increase in volume. When I see spikes in volume, I generally look for indications that confirm a change in direction and trade accordingly. Of course, this is just one volume function you can see and we will examine other volume actions in future articles to further our understanding of the topic.
In summary, I have said that most traders in mini e-trading misunderstand volume and a careful look at volume can increase your understanding of potential price action. Additionally, higher volume at SAR levels may indicate a change in direction, while lower volume may indicate price action will continue through support and resistance points. Finally, I have recommended that Mr. Arms write as an excellent point to increase your awareness of volume effects in both zero-sum markets and markets that are populated by market makers.
