S&P
500:
Examples of a Short-Term Trades
We define a “short-term” trend as a general market trend that usually lasts
from a few hours to several days.
The following example illustrates the basic principles behind our
MarketVolume® analysis. Chart 1 below shows the relationship between index
levels and the volume moving average (VMA) over the short-term.
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Chart 1. Relationship between volume moving average (VMA)
surges and index reversal points. Feb. 25 - March 4, 2005. |
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The chart above was created with our JavaVolume® charting
technology. JavaVolume® charts enable traders and investors to anticipate future
market movements and trend changes over the short-term.
The blue line in Chart 1 represents a trend line of the volume
moving average (VMA). The chart shows the relationship between index levels and
volume patterns over the short-term. Surges in the VMA subsequently affect index
price movements, causing the index to change direction. Note how almost every
time the VMA peaks, an index reaction follows. Knowledge of this pattern can
lead to numerous profitable trades; however, it is essential to interpret the
volume surges correctly. For instance, it is crucial to assess the magnitude of
a given VMA surge. This can be achieved by assessing the height of a
(shorter-term) VMA line atop a volume surge and to compare it to the height of a
(longer-term) VMA line that represents volume activity over a more extended
period of time.
In Table 1 below, we list the values of different VMA surges
at the moment the actual surges occur (see points A, B, and C). We then compare
a 60-minute VMA (this is a setting that allows you to see volume surges clearly
on a 5-day chart) with a 1-day VMA (this longer-term VMA is smoothed out as it
represent the average volume activity over a longer period of time). The
magnitude of a particular VMA surge can be assessed by simply dividing the value
of the 60-minute VMA by the value of the 1-day VMA. The last column in Table 1
shows how much the index moved (up or down) following a volume moving average
surge (only short-term reversals are studied in this example).
Table #1. Evaluation
of S&P 500 Volume Surges.
Reference
Point |
60-min
VMA |
1-day
VMA |
VMA Surge
Magnitude
60-min VMA/1- day VMA |
Reversal Trend |
| Chart #1 - Point A |
4,227 K |
3,017 K |
1.40 |
15 points up |
| Chart #1 - Point B |
3,666 K |
2,962 K |
1.24 |
10 points down |
| Chart #1 - Point C |
3,790 K |
2,992 K |
1.27 |
more then 15 points up |
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The magnitude of the volume surge seen at point A in Chart 1
is 1.40. This means that the 60-minute VMA protrudes 40% above the 1-day VMA.
Our research shows how surges in the VMA subsequently affect
price (index level) movements and how they frequently cause an index to reverse
direction. In Chart 1 above, note how the S&P 500 index rallied 15 points after
a volume surge occurred at point A, fell 10 points after reaching point B, and
rose by more than 15 points after the volume surge seen at point C.
Questions and answers about volume surges:
- If I initiate a trade based on the appearance of a
“buying surge” (defined as a surge that occurs as the index is moving
lower), do I have to wait for a selling surge (defined as a volume surge
that occurs as the index is moving higher) in order to close this trade?
No, we would not suggest such an approach. Depending on the prevailing
mid-term trend, the index might reverse its movement without producing a
volume surge. We strongly believe in taking profits at predetermined targets
– for instance, cashing in once the market has moved a specific number of
points in your anticipated direction. Using the example above, you might
have taken a profit once the index moved 6-10 points beyond the level where
the initial volume surge that prompted you to take the trade occurred.
- Could I use the numbers you presented above (to
calculate the magnitude of volume surges) as a trading system and utilize it
to place trades? For instance, should I open a trade when I see a surge in
the 60-minute VMA that protrudes 25% above the 1-day VMA?
While the specific numbers used above serve only as an example, it might be
feasible to develop your own trading system based on a VMA surge magnitude
that best fits your particular trading style. For instance, for short-term
trading applications, you might want to experiment with a 1-day chart and
compare a 30-minute VMA setting (to see volume surges) with a 240-minute
setting (to see average volume levels over longer periods of time).
- On your charts, how can I track 2 volume moving
averages (VMAs) simultaneously?
At the present time, our charts allow you to plot only a single real-time
volume moving average (VMA) at a time. Our developers are currently working
on a new version of our index volume (IV) charts that will incorporate this
feature. The new version will be implemented in a few months.
Until the new solution becomes available, you may wish try the following:
Because a long-term VMA on a chart with a short-term timeframe (e.g., a
1-day VMA on 5-day chart) more or less resembles a horizontal line, you can
approximate the long-term VMA by drawing such a line directly onto the chart
(click here to see how to
draw lines on chart). You can then apply the short-term VMA (e.g., a
60-minute VMA) and are now in a position to monitor the magnitude of VMA
surges in relation to the line you just drew (i.e., the line that
approximates the longer-term VMA).
| Disclaimer: The chart
example is intended for educational purposes only – it does not
constitute trading advice, nor does it make or imply any market trend
predictions. |
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