The ULTIMATE Beginner's Guide to VOLUME TRADING

Main ideas & lessons (Volume Trading Beginner Guide)

Purpose of volume trading

Use volume to:

• Confirm price movements.
• Anticipate potential market reversals.

Focus on:

• Volume spikes and volume drops
• “Standard” interpretations of volume vs. price
• Futures-specific relationships involving open interest
• Relationship between volume and volatility
• Common volume indicators (histogram, oscillators, accumulators, volume profile)

Educational disclaimer

Video is for education only, not investment advice. Any use is at your own risk.

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Core concept: What “volume” means

• Volume = how much a market has traded in a given period (market activity).

Volume measurement differs by asset class:

• Stocks: number of traded shares
• Futures: number of traded contracts
• Currencies: number of ticks
  • Tick = minimum price change
  • Tick volume counts the occurrences of the minimum price movement during the period.

Key point: Different measures (shares/contracts/ticks) are slightly different ways of capturing the same underlying activity. Higher activity typically means higher total volume (including tick volume).

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Fundamental volume patterns (step-by-step interpretation)

1) Volume spikes

Definition:

• A significant increase in volume where the period’s volume is a few times larger than average.

Meaning:

• Indicates something significant happened
• Suggests many traders/investors entered with a “bias”

Two types:

• Sudden spike
  • Abrupt jump in volume
  • Often caused by major unexpected news or scheduled major releases
  • Use: confirms the corresponding price movement in that period
• Crescendo spike
  • Volume increases gradually before peaking, then drops
  • Often driven by increasing buyer/seller participation
  • Not necessarily tied to explicit news events

2) Volume drops

Definition:

• A decrease in volume / trade activity

Meaning:

• Suggests supply and demand near equilibrium
• Often associated with sideways price movement

Practical takeaway:

• Falling volume frequently aligns with range/pausing behavior rather than strong trends.

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Standard interpretation: Volume histogram vs. price action

Compare whether:

• Volume is rising or falling
• Price is rising or falling

Four basic cases:

1. Volume rising + price rising
   • Bullish confirmation
2. Volume rising + price falling
   • Bearish confirmation
3. Volume falling + price rising
   • Weak bullish market (up-move lacks sustaining volume)
4. Volume falling + price falling
   • Weak bearish market (down-move lacks sustaining volume)

Additional applications mentioned

• Breakout confirmation
  • Rising volume can confirm a breakout direction (e.g., volume rising as price breaks below a channel).
• Overall market bias (using relative volume)
  • If up moves have higher volume than down moves → bullish bias
  • If down moves have higher volume than up moves → bearish bias
  • Caution: compare “legs” carefully because:
    • Up moves can have lower volatility / longer duration
    • Down moves can have higher volatility / shorter duration
• Guideline given:
  • Volume confirms price action and can act as a leading indicator because it may contain less lag than price-based analysis.

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Futures-only concept: Open interest + volume

Applies to futures due to open interest data.

What open interest means

• Open interest increases/decreases depending on whether new participants enter vs. existing positions close/roll.

Open interest change rules (as described)

• New buyers meet new sellers → open interest increases
• New buyers meet old sellers / new sellers meet old buyers → no change
• All buyers meet old sellers → open interest decreases

Combining volume and open interest (trend phase interpretations)

1. Volume rising + open interest rising
   • Trend confirmed
2. Volume rising + open interest falling
   • Position liquidation (described as a phase)
3. Volume falling + open interest rising
   • Slow accumulation (before an uptrend)
4. Volume falling + open interest falling
   • Congestion / sideways market

Extended interpretation using price + volume + open interest

• Price + volume + open interest rising
  • New buyers entering
• Price rising while volume + open interest falling
  • Signals the downtrend will end
• Price falling while both volume + open interest falling
  • Money leaving the market
• Price falling with both volume and open interest rising
  • Bearish money entering

Volume vs. volatility relationship

• Rule of thumb: High volume tends to coincide with high volatility
• Observation: as volume rises, a volatility measure (standard deviation) also rises
• Caveat: not always—there are exceptions

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Methodology: Common volume indicators (with how they work)

A) Volume Histogram (raw volume)

Purpose:

• Foundation indicator used for:
  • Spikes
  • Drops
  • Basic volume/price relationships

Features (as described):

• Bar height = volume per period
• Bar color (TradingView):
  • Green if candle bullish
  • Red if candle bearish

Spike/drop detection:

• Uses the histogram directly

Average volume overlay:

• Often plotted as the average of the last n periods (commonly 50-period average)
• The average introduces lag (smoothing), while raw histogram has no lag

Limitation:

• Raw volume histogram can be hard to read due to erratic movement

B) Volume Oscillator

Purpose:

• Make volume changes easier to observe

Construction:

• Uses the difference between a fast and slow moving average of volume (alternative ratio method mentioned)

Key idea:

• Captures rise/fall of volume with minimum lag
• Peaks/troughs align with histogram peaks/troughs, but are easier to interpret

C) On-Balance Volume (OBV) / Unbalanced Volume

Origin/source noted:

• Made famous by Joseph Granville

Purpose:

• Accumulates raw volume without using averages

Core assumption (flagged as flawed):

• Bullish candle volume treated as if buyers caused it
• Bearish candle volume treated as if sellers caused it
• The guide states this is not fully true

Mechanics (step-by-step):

• If current close > previous close:
  • OBV = OBV(previous) + volume(current)
• If current close < previous close:
  • OBV = OBV(previous) − volume(current)

Standard interpretation (OBV vs price):

1. Price up + OBV up → strong uptrend
2. Price up + OBV sideways → moderate uptrend
3. Price up + OBV down → weak uptrend / near reversal possible
4. Price sideways + OBV up → accumulation (bottoming range)
5. Price sideways + OBV down → distribution (topping range)
6. Price down + OBV sideways → moderate downtrend
7. Price down + OBV down → strong downtrend

Claimed advantage:

• OBV is devoid of lag
• Not tied to a fixed window, reducing some distortion

D) Money Flow Index (MFI)

Purpose:

• Similar to RSI but includes volume

Characteristics:

• Oscillator bounded 0 to 100

Inputs:

• Uses Typical Price (TP) instead of close:
  • TP = (High + Low + Close) / 3

Positive vs negative money flow:

• If TP(t) > TP(t−1):
  • Positive money flow accumulates: prior positive + TP * volume
• If TP(t) < TP(t−1):
  • Negative money flow accumulates similarly

Calculation concept:

• Compute a ratio of positive to negative money flow, then convert into the bounded oscillator (RSI-like)

Lesson emphasized:

• Overbought/oversold levels described as “mostly useless” for non-stationary series
• Divergence highlighted as more valuable
• Practical note: MFI sometimes shows divergences that RSI doesn’t

E) Herrick Payoff Index (HPI)

Scope:

• Futures market only, because it requires open interest

Purpose:

• Combines volume + open interest to interpret market phases

Use:

• Can be combined with other volume indicators (e.g., volume oscillator) to detect interpretations like liquidation (example given: HPI falling while volume oscillator rises)

F) Accumulation/Distribution (A/D)

Purpose:

• Detect buying vs selling pressure using a ratio involving candle body and range

Construction:

• Determines a multiplier based on candle body relative to high–low range
• Multiplies that by volume and adds it cumulatively to the prior indicator value

Interpretation:

• If A/D moves in the same direction as price → confirms price direction
• If A/D diverges from price → possible reversal

Method refinement suggested:

• Compare price highs/lows with indicator highs/lows (divergence approach), not only line direction

Limitation mentioned:

• Formula doesn’t compare inter-period price range; gaps can desynchronize it and produce unreliable signals

Divergence comparison:

• A/D can signal bullish reversal divergence that momentum oscillators (like RSI) might miss

G) Volume Profile (advanced)

Purpose:

• Shows volume by price level within a chosen range

Structure:

• Horizontal histogram of volume at each price level

Key components:

• POC (Point of Control) = price level with highest traded volume in the range
  • Red line marks POC; black line extends it

Interpretation:

• High volume price levels:
  • Often act like support/resistance / consolidation barriers
• Low volume price levels:
  • Indicate “free space” / trend pathways where price can travel with less resistance

Example takeaway:

• POC can later be reused as support

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Overall conclusions / key takeaways (as stated)

• Many volume indicators are either:
  • Raw cumulative or
  • Oscillators
• They generally aim for little to no lag
• Beware of bold assumptions:
  • Example: OBV assumes all bullish candle volume comes from buyers (not strictly true)
• Use standard interpretation to understand trend phases
• Use volume profile for hidden support/resistance
• Volume is not meant to be used alone:
  • Analyze it in context with other techniques for more reliable results

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Speakers / sources featured

• No on-screen speaker name provided in the subtitles
• Source person explicitly mentioned:
  • Joseph Granville (credited with popularizing OBV)
• Referenced channel/website (not a person):
  • fractalfowpro.com (website mentioned at the end)
  • “dark secrets of technical analysis” (video referenced in YouTube card)