How to Properly Interpret Trading Volume in Futures | Optimus Futures

How to Properly Interpret Volume in Futures Trading


This article on Futures Trading Volume is the opinion of Optimus Futures.

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What is Futures Trading Volume and Why is it Important

Unlike forex and other over the counter markets where volumes represent merely ‘tick volumes’ that gauge the number of ticks that price moves in a certain period, volume reading in centralized futures  markets are more accurate and authentic, actually representing the total number of contracts that were traded (exchanged hands) in that given trading period – usually a day.

To an informed trader, this piece of information can be extremely valuable in making timely trading decisions linked to taking, exiting or managing a trade setup as well as analyzing the market in general.

It is not hard to imagine why trading volumes would be important. A primary motive of a trader when analyzing the market is to be able to pinpoint occasions when overall interests spike resulting in a favorable price move. On the contrary, a trader is typically looking to avoid trading in situations when the interest levels are low. For futures markets, looking at volumes can lead to direct insight into market sentiment, on the back of fairly repetitive and accurate patterns and rhythms.

In the following sections, we look at some of these rhythms in an attempt to further explain the importance and usefulness of volume in futures trading.

High Volume Reversals

Reversing existing dominant trends often requires an increased bout of trading activity. Consider a strong downtrend where the sellers are dominating the market. For this market to reverse, buyers will need to step in – and in big numbers – to create a sizeable impact in the market, to be able to reverse the trend. The same would be the case for an uptrend reversal where a large number of sellers will need to enter the market to absorb excessive market demand and allow the price to start falling.

In either case, we are typically looking for increased trading activity. Since volume measures the actual trading activity in a given period, traders using volume analysis prefer to see large volume bars (indicating high volume) matched by large dominating candlesticks on the chart to make sense of a true reversal.

futures trading volume

Here we have the recent bounce back up on the S&P500 Emini future market. Notice how when the market bottoms out (leaving behind long wicks on the lower side of candlesticks), we have added confirmation from abnormally large volume bars too – indicating the increased trading activity that lead to the all the major preceding selling pressure to be absorbed by the buyers coming into the market.

Here is another example of the same phenomena presenting itself repeatedly on different occasions on the same market:

futures trading volume

High Volume Breakouts

Just as high profile and sharp reversals often require increased trading activity for a successful execution of the reversal maneuver, market breakouts past significant price levels and through various chart patterns also typically require increased trading activity. This can often serve to be a valid indicator of a ‘true’ breakout versus a ‘false’ breakout, where price will seem to be taking off in the breakout direction but without the anticipated volumes.

futures trading volume

The above chart illustrates two such examples. In the first scenario, you will note how trading volume ticks lower as price tightens within a wedge pattern (indicated by the two red trend lines). The eventual breakout to the upside also results in a noticeable increase in volume – which is what you would normally expect in a true breakout.

The second example illustrates the same phenomena from a different perspective. Notice that as price initially breaks out of the wedge pattern to the upside, we do not get a corresponding increase in volume, suggesting traders’ interest has not yet converted into increased order flow in the market that is normally linked with breakouts. We do eventually get that uptick in trading volume as price pulls back to the trend line, confirms support for it, and pulls back up. You will also note, that even though price does eventually push hard to the upside, we once again have a dip in volume that leads price to stall again and eventually reverse.

Low Volume Pullbacks

Another situation where following volume readings can be extremely beneficial is when price pulls back into a dominant trend. Traders are often confused regarding what to expect of the pullback? Is it a minor pullback or a major one? Is it a pullback at all or an actual reversal of the trend? Again, looking at volumes can spell a lot of useful information. If a pullback is a minor and non-threatening one, the trader can expect volume to be low during the pullback and consequently higher when the trend resumes.

futures trading volume

The above chart shows a dominant downtrend, marked with two specific occasions where we have the above-mentioned phenomena play out. On each of the occasions, we have a minor pullback into the downtrend, matched with noticeably lower volume reading, confirming that the pullback is likely non-threatening to the strength of the downtrend. As price resumes its way down, you will notice that volume once again ticks higher (the volume bars just right of the marked zones).

You will also find other pullbacks into the trend that have not been marked but still proved to be non-threatening and minor in relation to the strong downtrend. That is because we did not notice the obvious change in volume on those occasions. Just like all other trading and analysis tools, volume readings will not give you a confirmation a 100% of the times. But when they do, they can surely add a lot of confirmation and weight to the analysis leading to improved judgment from the trader.

Final Word

We highlighted above just a few cases of how reading trading volumes on centralized financial markets like futures markets can provide a definitive edge to a technical trader. There are several other interpretations of volume that can be equally effective.

From full-fledged trading strategies that directly implement volume readings into chart analysis and entry or exit triggers (for example volume spread analysis or VSA), to using volume analysis strictly as an additional confirmation tool – there are several ways a trader can employ trading volume into their day to day trading for potentially improved trading performance.

There is a substantial risk of loss in Futures trading. Past performance is not indicative of future results.

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