Trading with Volume

Volume is one of the strongest indicators for market action. Using it can not only empower your trade entries but also warn you of weakening trends. In this article you will learn to incorporate Volume in your trading.


Volume precedes Price
We will now describe several truths regarding indicators, price and predictive abilities. Indicators are a derivative of price, meaning that they are calculated from information extracted from price, therefore they will always be somewhat lagging behind price and their predictive abilities will decrease.

Volume, unlike indicators, is not calculated from price, quite the opposite - price is the result of action of buyers and sellers which is presented as the Volume. This is the reason why Volume is a very strong technical tool and is very useful in predicting and trading the FOREX markets.

Volume should Confirm Price Action
Because of Volume's strong connection with price, it can be used as a leading indicator with regard to price action. The main principle for incorporating volume in your trading is that Volume should Confirm Price Action.

Example:
If price is in an uptrend, Volume should also be in uptrend. This signals that the uptrend is healthy and has 'fuel' for advancing.
If price is in a downtrend, Volume is also important though a bit less. A downtrend can take place even without a strong volume.
If price is in a range, Volume should be average and not too strong.

When volume does not confirm price movement - e.g. Price is moving up while Volume is moving down. Each divergence of Volume and Price can indicate that the trend is about to reverse. Note that this is merely an indication and not a trading signal. More confirmation and signals of other indicators should be used to confirm and take trades based on this analysis.


Indicators that Use Volume
In order to have a more objective means of analyzing Volume action, one can use several indicators that incorporate Volume in their calculation. This includes the Money Flow Index and Force Index.

The easiest method of trading with Volume is to place a Exponential Moving Average to smooth it. While the readings of actual, raw volume are hard to interpret, the smoothed values are easier to trade by and reach trading conclusions.

the Fractal technical Indicator

One of the most basic ways in which traders can determine a trend is through the use of fractals. Fractals essentially break down larger trends into extremely simple and predictable reversal patterns. This article will explain what fractals are and how you might apply them to your trading to enhance your profits.
What Are Fractals?
When many people think of fractals in the mathematical sense, they think of chaos theory and abstract mathematics. While these concepts do apply to the market (it being a nonlinear, dynamic system), most traders refer to fractals in a more literal sense. That is, as recurring patterns that can predict reversals among larger, more chaotic price movements.

These basic fractals are composed of five or more bars. The rules for identifying fractals are as follows:

* A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
* A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.


The fractals shown in Figure 1 are two examples of perfect patterns. Note that many other less perfect patterns can occur, but the basic pattern should remain intact for the fractal to be valid.

The obvious drawback here is that fractals are lagging indicators - that is, a fractal can't be drawn until we are two days into the reversal. While this may be true, most significant reversals last many more bars, so most of the trend will remain intact (as we will see in the example below).

Applying Fractals to Trading
Like many trading indicators, fractals are best used in conjunction with other indicators or forms of analysis. Perhaps the most common confirmation indicator used with fractals is the "Alligator indicator", a tool that is created by using moving averages that factor in the use of fractal geometry. The standard rule states that all buy rules are only valid if below the "alligator's teeth" (the center average), and all sell rules are only valid if above the alligator's teeth.

Figure 2 is an example of such a setup:

As you can see, the primary drawback to this system is the large swings that take place. Notice, for example, that the latest fractal had a drawdown of over 100 pips and still has not hit an exit point. However, there are countless other techniques that can be applied in conjunction with fractals to produce profitable trading systems.







Figure 3 shows a forex trading setup that uses a combination of fractals (multiple time frames), Fibonacci-based moving averages (placed at 89, 144, 233, 377 and their inverses) and a momentum indicator. Let's look at a recent trade setup for the GBP/USD currency pair to see how fractals can help:

Figure 3

Here is a basic rule setup that is used when using a chart with a four-hour time frame:

* Initiate a position when the price has hit the farthest Fibonacci band, but only after a daily (D1) fractal takes place.
* Exit a position after a daily (D1) fractal reversal takes place.

Notice how the fractals pinpoint meaningful tops and bottoms? This helps to take the guesswork out of deciding at which Fibonacci level to trade - all we have to do is check to see if the daily fractal occurred. We should also note that the trend strength began increasing at the sell fractal, and topped at the buy fractal. Although we lose some pips with the confirmation, it saves us from losing out on mere market noise - 139 pips certainly isn't bad for three days! (For further reading, see Trading Without Noise.)

Things to Consider
Here are a few things to remember when using fractals:

* They are lagging indicators. They are best used as confirmation indicators to help confirm that a reversal did take place. Real-time tops and bottoms can be surmised with other techniques.
* The longer the time period (i.e. the number of bars required for a fractal), the more reliable the reversal. However, you should also remember that the longer the time period, the lower the number of signals generated.
* It is best to plot fractals in multiple time frames and use them in conjunction with one another. For example, only trade short-term fractals in the direction of the long-term ones. Along these same lines, long-term fractals are more reliable than short-term fractals.
* Always use fractals in conjunction with other indicators or systems. They work best as decision support tools, not as indicators on their own.

Conclusion
As you can see, fractals can be extremely powerful tools when used in conjunction with other indicators and techniques, especially when used to confirm reversals. The most common usage is with the "Alligator indicator"; however, there are other uses too, as we've seen here. Overall, fractals make excellent decision support tools for any trading method

Fibonacci and Forex: Trading Using the 88.6% Retracement

In this series of articles, we have so far built up a foundation of Fibonacci as applied to trading: how the Fibonacci ratios are derived, how to measure Fib Retracements and most recently how to measure Fib Extensions. This article focuses on trading withe 88.6% retracement.
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Minimizing Your Risks (Smartly)

Traders often hear advertisements that tout outrageous gains like 50% in one week. We start trading for a while, and suddenly will reality sets in as we understand that these gains are not sustainable. Now that reality has set in, let's take a look at how a prudent trader goes about discovering how to control their risk in the Forex market.
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Fibonacci and Forex: Fibs with Chart Patterns

How can you use Fibonacci levels as part of a larger chart pattern? Find out here!
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How the Greek Drama Affects Forex Trading

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When to Use a Take Profit Order

When Forex traders place their trades, the majority of them have no idea what their final destination is as far as price. Because of this, there is a certain set of situations that dictate whether or not you may want to place a take profit order when trading Forex.
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What are CFDs (and Why Should I Trade Them)?

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Swing Trading: Advantages and Disadvantages

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The New Carry Trade by Default

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What is a Requote?

When you are trading Forex, you are going to come across the term “requote” sooner or later. While it isn’t all that common, it can happen and you should be aware of what it means and how to avoid them.
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Why to Trade Forex During a Recession

It is no secret that the recent debt crises in the PIIGS countries and the US, coupled with a crippling natural disaster in Japan, have rocked the financial markets worldwide. Forex trading may be a great way to stay afloat in a sinking market.
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AUD/NZD Waiting For a Catalyst

Commodity currencies have been among the best performing Forex instruments of past few months, especially the New Zealand Dollar, which continues to get stronger seemingly every day. Not only against the US Dollar, but in relation to its peers as well.
http://www.dailyforex.com/forex-technical-analysis/2011/07/AUD-NZD-Waiting-For-a-Catalyst/8411

Is EUR/GBP Ready to Resume Downtrend?

The Euro stabilized to some degree in days following the agreement to aid Greece for the second time. It seems that fears about possible dissolution of the common currency are gone, at least for now.
http://www.dailyforex.com/forex-technical-analysis/2011/07/Will-EUR-GBP-Resume-Downtrend/8420

EUR/USD Daily Chart and Signal

When reading any newspaper, it seems like a rough landscape for the EUR, since Eurozone leaders are focusing on the region's current debt problems while US leaders are struggling to reign in projected future defaults. A first look at the pair looks unpromising, but I think there's a chance for profits if we look at the cycles found in the charts.
http://www.dailyforex.com/forex-technical-analysis/2011/07/EUR-USD-Chart-and-Signal/8429

GBP/JPY Testing 126.60 Support

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http://www.dailyforex.com/forex-technical-analysis/2011/07/GBP-JPY-Testing-Support/8439

Common Currencies Downtrending On the Short-Term Trend

The EUR/USD , GBP/USD and USD/JPY downtrending on the Very Short-Term Trend
http://www.dailyforex.com/forex-technical-analysis/2011/08/Common-Currencies-Downtrending-On-the-Short-Term-Trend/8469

EUR/USD Trading Signal - August 03, 2011

EUR/USD signal based on Fibonacci levels.  Good for 2-3 days.

http://www.dailyforex.com/forex-technical-analysis/2011/08/EUR-USD-Trading-Signal--August-03-2011/8478

EUR/USD Forecasting

After yesterday’s news in America, some people expect that a relative calm in the markets will be lived.
http://www.dailyforex.com/forex-technical-analysis/2011/08/EURUSD-Forecasting/8479

GBP/USD Breaks Above 1.6386

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http://www.dailyforex.com/forex-technical-analysis/2011/08/GBP-USD-Breaks-Above-Friday-s-Rally/8499

USD/JPY - Last Week's Rally Retraced

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http://www.dailyforex.com/forex-technical-analysis/2011/08/USD-JPY-Rally-Retraced/8511

EUR/USD - Watch Carefully Today

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http://www.dailyforex.com/forex-technical-analysis/2011/08/EUR-USD-Watch-Carefully-Today/8523

Debt Debate Inspires U.S. Dollar to New Record Low against Swiss Franc

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U.S. Dollar Falls Broadly in Asian Trading as Fear Reigns

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Euro Again on Defensive as Contagion Fears Continue

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Euro Falls on Possible Spanish Debt Downgrades

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Investors Flock to Safe Havens as Market Jitters Resume

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Bank of Japan Intervenes, Promises Continuous Measures to Curb Yen Rise

Earlier in the Asian trading session, the Bank of Japan followed through on earlier hints that an intervention in the Yen’s rise would be forthcoming.

Sell-Off in Equity Markets has Investors Rushing to Safe Haven Currencies

As analysts had previously suggested, the effects of the intervention efforts by the Swiss National Bank were short-lived.

US Credit Downgrade Sends Dollar Broadly Lower

Following Friday’s announcement by Standard & Poor’s rating agency that the U.S. credit rating was to be downgraded to AA+ from their top-of-the-line AAA rating, the U.S. Dollar is under heavy pressure.

Swiss Franc Pushed Higher on Safe Haven Bid

The fallout from the U.S. downgrade continues at a rapid clip; a full 24-hour cycle has passed, with Asian, then European and finally, U.S. markets all suffering from sell-off fever.

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