At an undisclosed location in the North Atlantic, 1,000 feet below sea level, during the height of the Cold War. A game of cat and mouse was unofficially being played. The table stakes for this round: the fate of the world and the pride of two super powers.
As the US and USSR played a deadly game of chess, it was the nuclear submarine commanders who held the power. At their disposal: high-powered sonar. This told them everything they needed to know about their whereabouts, the enemy, and how they needed to maneuver.
In today’s market, volume acts as your sonar in telling you everything you need to know about value and price. It provides a long range perspective on where you should camp out to stalk entries. And it delivers the real-time intelligence you need to confirm high-probability kill shots.
A trail to a submerged target millions of traders miss
Before modern sonar, there was no real way for a surface ship to protect and defend from a ‘u-boat’. The submarine, even in its early crude form could sneak up, attack, and slip away before anyone was the wiser. In a desperate measure, the British took to smashing the periscopes with hammers on clandestine missions as their only defence.
For millions of retail traders trying to figure out what’s going on with price in any given market, hammers are in hand, swinging without success. These primitive methods often take the form of lagging indicators that simply track price, but do nothing to tell you where it’s headed.
Like the introduction of sonar, it’s the volume that precedes price that tells you much of what you need to know. From both a long- and short-term perspective, you can triangulate where any market is going — and likely headed — simply by using volume to ‘ping’ individual price levels.
Even though it’s right in front of every retail trader — it goes overlooked in favor of a blinking arrow/signal that is wrong as often as it’s right.
The heat plume of value that every market leaves
The more sonar technology advanced, the more deadly operating in the sea became — both for submarines and those hunting them. It’s the infrared detectors that are used by today’s submarine hunters to track and kill enemy subs. Thanks to forward-looking infrared, the heat signatures of big, fast-moving nuclear attack subs can be identified.
Used correctly, volume can be used as your forward infrared to track the heat of price. Simply put: historical increases in volume at particular price levels indicate future interest in those same levels when they’re revisited. Conversely, decreases in volume in the past mark price levels where the market is likely to back away again in the future.
These spikes and retractions in volume tell you the market’s position on value, and the extremes of value — specifically expensive or cheap price conditions.
When you know when the market is within its preferred value zone, you know they’re getting the price they prefer (not ideal for you as a trader). When they exit their value zone — your opportunity to attack for a profit surfaces.
Looking at the ES example above, you can clearly see where the market has the most appetite from a long-term value perspective. Roughly eyeballing the volume that came before the current price (with a 300-day look back), you can see where 70% of the action was — creating fair value.
High-probability targets at any range
For as deadly as a submarine is, once its location is triangulated, it’s basically dead. It can’t run, hide or outmaneuver a torpedo that’s hot on its tail. Regardless of what Sean Connery made you believe in Hunt for Red October — the kill percentage is pretty high once location is nailed.
The same is true with entries, once you’ve located value extremes in any given market. This can be done effectively using a macro and micro look at volume. With a 300-day lookback on volume, we know what the market’s long-standing attitude is towards particular price levels.
Layering in short-term 24-hour lookbacks give you the ability to further triangulate a location — especially when you see pullbacks in both views. Using the ES example above, note the Volume Rejection Level [VRL] denoting a long-standing low volume point where price has backed away.
With this as a starting location point, we can then use Volume at Price — a dynamic look at the value zone to see if there are any drop-offs just outside of the short-term value zone. With the ES example above, you can see how both these macro and micro volume conditions converge — creating an optimal entry target.
Vital intelligence that your signals will miss
There are plenty of indicators, signals and oscillators that track volume. Very few tools tell you volume that’s taken place before at every price level — much less give you a comparison look at immediate short-term activity at price.
Without an understanding of historical volume, you might as well look for a periscope protruding from the water from space. You’ll never fully understand where price is at relative to value — until it’s too late.
Further, it’s the Order Flow Sequence Tracking that allows you to get a ‘lock’ on what’s happening with buyers and sellers. With our example, we not only have our look at macro/micro volume — but clear indications that buyers are backing away and sellers are stepping in.
This intelligence tells you not only where to locate the trade, but also when and if you should ultimately fire.
Take aim at glory and profits in the face of any market force
It’s widely agreed that when it came to the sea, the nuclear sub commanders were the most powerful officers in the world. At that time, they were disconnected from the world, except when they surfaced to deliver reports and receive orders.
This left them to make decisions as they needed, using the intel that was available to them — primarily sonar. Use the intelligence that volume delivers — which goes unseen or overlooked by millions of today’s retail traders.
When price nears the breech of a value zone and towards a VRL, flood the torpedo tubes — your bogie has been identified. When you see a corresponding steep drop in volume at price just outside the value zone — get ready to fire.
Check down with responsive activity — then turn the key and press the button. Profit with glory using the advanced weaponry afforded with volume and Order Flow Sequence Tracking.
Noft Traders offers a Funded Trader Program. To learn more, visit their informational page at NOFT-Traders.com.