Gauging trader commitment

You can be the best chart reader on the planet and still lose money trading. Losses are generally a function of bad money management, such as setting a profit target unreasonably high or a stop too low.

But losses can also be a function of not having the “feel” of the market. Let’s define feel as a grasp of what the main players are thinking and doing. You may think that other traders are in buying mode, but are they? You know only if you can see the actual buying volume.

As technical analyst and author Joe Granville and others have noted, a real rally is accompanied by rising volume. If prices are rising but volume is flat or falling, watch out.

New buyers — fresh blood — are not joining the rally, and it may not last. Very high volume at a market high may mean the top is in. If volume is extremely high and price is making new record highs, many traders have a lot at stake — and any significant price drop can cause a stampede of covering. As in price analysis, an extreme often precedes a reversal.

Finally, if volume is building during a consolidating or sideways period, we expect a breakout but we don’t necessarily know in which direction. Volume changes are a dandy supplement to technical indicators and fundamentals. Forex traders are severely handicapped by not having good volume information, as stock traders have. In the spot market, there is no volume information, because every trade is a private transaction between customer and bank. Wire service reports tell us that “volume is heavy” or “the market is thin,” but that’s not very specific and does us little good.

In futures, the exchange doesn’t publish volume until after the close. For real-time analysis, all that’s available is tick volume, which is less than ideal. You get a change in the tick whether the new trade was one contract or a hundred, and while you can check “Time & Sales” to see the actual volume, it’s a cumbersome process. If you are trading in an intraday time frame, by the time you see big volume developing, it’s probably too late.