Last Updated on November 28, 2022 by Mark Ursell
This article shows how trading volume combined with price can improve your trading results.
Watch the Video
In the video I demonstrate my analysis and show you the results.
Poker Table Selection
Top poker players use every advantage they can. They spend years learning the odds, optimal betting strategies and psychological control of their emotions. All of this is important, but they are not the critical factor in deciding whether the player will win.
In poker, there is a concept of table selection. This theory states that your skill level is only one part of the equation. The skill level of the table you are playing against is even more important.
To maximize your chances of winning, you should always play on the table with the weakest players.
This is only an analogy – poker is not trading. For most traders, you are not going to find the equivalent of a weak table. But you can choose a table that will suit what you are trying to do and give you a higher chance of success.
What I’m talking about is a power that every trader has. This is the option to trade only when the conditions suit what you are trying to do.
What Has This Got To Do With Trading Volume?
Any time you open a trade you are playing at a slightly different table. There will be a different group of traders and investors buying and selling at the same time as you. They will have different aims and objectives and different information.
This changes all the time, throughout every day and every week of the year.
One way of understanding who is sitting at the table before you enter a trade is to look at volume patterns. This gives you an insight into the number of other players and their level of commitment.
How I Did The Analysis
In this analysis, I used a Tradinformed Backtest Model. This is an Excel-based model that you can use to test your trading strategies, optimize your settings and develop new strategies.
Get more information: Tradinformed Backtest Models
Volume Trading Analysis – Settings
Rising Volume Entries
In my analysis, I measured volume in three different ways. I did this firstly, to understand whether these different measurements would show similar results. Secondly, I wanted to see which measurement of rising volume showed the best results.
I then combined these different entries with a variety of exit conditions and filters.
I also had a fourth scenario that represented the chance of entering a trade on any random day. This scenario used the same filters and exit conditions as the rising volume entries.
- Two consecutive days of rising volume.
- Volume Stochastic rising above 50% (stochastic oscillator applied to volume).
- Volume above the 10-day SMA.
- Time Close.
- Trailing Stop (fixed at 2%).
- Profit Target.
- Consecutive negative daily closes.
- 30-period linear regression pointing upwards (indicating a short-medium term bullish trend).
Market, Timeframe, Analysis Period and Trading Direction
- SPY ETF.
- Daily timeframe.
- 2000 – 2020.
- Long Trades Only.
Key Actionable Findings
- All three rising volume entries showed similar results. There was a variation between the different entries, but the results indicate that any of these could be used.
- All three entries outperformed random entry over the same time period.
- The entry “edge” declined over time. The SPY has had an upward bias over time. The advantage of the volume entry tends to decline over time when measured on the average gain per day.
- The optimal holding period for each entry was between 3-10 days. This optimal holding period was measured in terms of overall profitability, drawdown and the MAR ratio.
- The linear regression filter tended to improve performance. However, the overall most profitable strategies did not use this filter.
- All the volume entries were improved by entering trades on a minimum of 1 consecutive negative close. The previous day had to be negative when measured on a close to close basis.
Do this type of analysis for yourself using a Tradinformed Backtest Model. See how adjusting the stop-loss or closing system will improve your profitability. Learn more: Get Better Trading Results