How to Use One of Our New Favorite Tools: Volume at Price

08/19/2015 9:00 am EST

Focus: STRATEGIES


Unlike the traditional display of volume that visualizes total volume executed at a specific time, Tyler Yell, of DailyFX.com, illustrates how one of his new favorite technical tools—volume at price—is a unique way to visualize total volume executed at a specific price.

Talking Points:

  • What Is Volume at Price
  • How to Read Volume at Price
  • How Volume at Price Can Help Your Trading

Technical analysis is built upon seeing price patterns in the charts. Many traders find a few ways to look at price patterns in order to identify trades with a good risk:reward ratio. However, looking simply at price can leave out some important components of markets. One such important component is known as volume at price.

What Is Volume at Price

Volume at price is a unique data visualization tool used by traders who understand the importance of volume. The data visualized is on a different axis than most people associate with volume, namely volume is transferred from time to price. If volume tells you how many transactions have been performed, most traders look at volume at time or the X axis on a chart. Volume at Price uses the Y axis to show you how much volume has been performed at a certain price.

Volume at time is a very helpful tool because it can show you if one day showed extreme volume. However, you’ll likely notice that high volume happens on days of high important news events seen on the economic calendar or a surprise or shock in the market. Typically, traders will look to trend confirmation moves on high volume days but volume at price offers another dimension.

How to Read Volume at Price

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Volume typically displays the total number of live trades during a specified period. Most commonly, this is shown on the X axis or time plane. As the name implies, volume at price displays the total number of live trades performed at a specific price level. This is displayed on the Y axis. Instead of seeing how much volume was performed on a certain week, day, or hour, you can see how much volume was done at a specific price.

Your imagination likely does not have to travel too far to know that if one area of price attract a majority of volume than that price level has a lot of interest from multiple market participants. This is important because it likely means there are a good number of orders protecting that price from being broken. In other words, it will be more difficult for price to break through a level where volume at price is relatively high and it will likely be easier for price to break through levels where volume at price is relatively low.

NEXT PAGE: Volume at Price in Motion

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Volume at Price is focused on the Y axis, and therefore, a trader is looking for elongated bars to denote high volume on the report. The DailyFX report done by David Rodriguez shows volume at price for major currency pairs as well as distinguishing total volume—shown by orange bars—total buy side volume at price—shown by green bars—and total sell side volume at price—shown by red bars. The red and green bars are aggregated to show you total volume, and the longer the bar, the more volume happened at that price and the more significant the level.

How Volume at Price Can Help Your Trading

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Volume at price can be very helpful if you know that certain levels on the chart have attracted more volume than others. If you are looking for the market to breakout of a prior range, but there is a large amount of volume at the extreme levels of the range, then it is likely better to be patient and wait for price to find the level of preference higher or lower, as opposed to jumping ahead thinking you can divine the future. If you are trading in a trend—and the market is moving higher with significant volume at price below your order—you can be reasonably confident that the trend will have an easier time sustaining itself as opposed to reversing. Reversing through a level of high volume at a specific price is often difficult and can require economic data shocks or larger trend breakdowns which are relatively rare.

In the chart above of EUR/USD, you can see a large amount of volume in the price zone of 1.12 through 1.14. Due to the large amount of volume at price, many traders are looking to that zone as likely price resistance of EUR/USD. If that level holds as resistance and support of the range breaks around 1.0810, the trend is expected to resume and gather steam as those who held short trades as visualized by volume at price in the 1.12 to 1.14 zone are likely still in the trade and may begin adding to the trade.

However, if the 1.12 to 1.14 zone is invalidated, you can see there is very little order resistance until we get to the low to mid-1.20s. While resistance is thick, if broken, it is likely not worth fighting hoping the downtrend resumes. Rather, if price works its way through stiff resistance, a larger signal may be at force in the market.

Summary

Volume at price is a unique way to visualize total volume executed at a specific price. This is unlike the traditional display of volume, which visualizes total volume executed at a specific time. While both are helpful, volume at price is unique in helping you see where a batch of orders is likely sitting such that support or resistance may be honored. However, if price breaks through a zone where there is high volume at price, a significant reversal or breakout may be underway.

By Tyler Yell, Trading Instructor, DailyFX.com

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