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Volume Forecast strategies

Updated: Mar 23


Introduction

Whenever there is an imbalance in supply and demand, prices fluctuate as a consequence. The larger the imbalance, the bigger the price movement is likely to be. Most technical analysis trader would call this a breakout or a breakdown.

Using technical analysis, it is easy to identify areas of resistance or support, which a trader would qualify as demand or supply depending on what direction of the trade he is. The technical level is very much dependent on how many trades have orders placed at that price level by other traders. It is the volume that was traded at those level and that volume that will be traded that will determine if the level is going to break, hence a breakout or is it going to hold which would be a reversal.


An analogy is when airline tickets to holiday destinations rise due to increased demand in summer (If you are from a cold country). Airlines already anticipate the increase because it has happened in the past. The prices increase before the buyers get the ticket.

All HFT companies, including market makers, have some sort of forecasting model which help them judge what the future demand or supply will be. If you cannot have a prediction on the demand forecasts, you only have half the picture and your chances of trading successfully diminish drastically.


 

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Strategies

We have compiled some examples below where knowing how much volume will be traded can help in building confidence for holding a stock.


Scenario 1: Breakouts


If your technical level has not traded any volume and no one is on the other side of the trade, chances are the level will be overwhelmed by the current volume.

Small cap companies, which have a small float, have one crucial constraint which gives traders a significant edge. A surge in volume can most likely means that a short squeeze or breakouts can happen.

If the forecasted volume is more than the float, the float can rotate. When the float is rotated, it means someone bought the float which causes the supply to shrink. It is true provided that shares are not being printed due to At-The-Market(ATM) offering. An ATM increases the share supply. This is when we get our Faders in the next section.


Case 2:All day Fader


When someone is trying to sell 50M shares but the market makers volume forecast is only 10M. The imbalance in supply and demand causes the price to drop. Generally, an all-day fader will have an exponential diminishing volume pattern throughout the day.


Case 3: Reversals


Bull traps and bear traps have been around for centuries. Peoples psychology takes longer to change than technology. This makes trends that are driven by fear or greed predictable.

A common pattern is recently seen in the bear trap.

If the stock is predicted to trade 40M shares at the end of the day and a large portion of the shares, say 20M, has been traded within a range, panic can be initiated if a death drop candle happens.

This ensures the range will act as a resistance and short-sellers get a significantly reduced risk.


Examples

In the figures below, the left volume profile is derived from historical volumes, which has been combined with technical support and resistance lines. The volume profile on the right is the volume intraday.

Symbol BLIN on 2019-06-12 is an example of a bull trap. Most of the volume was traded in a small area. When the price dropped below that price, panic initiated. The diminishing volume also gives the short-seller confidence that the stock will fade all day.

Symbol BYFC 2020-06-30 is an example of a major resistance pattern. The diminishing volume on that day and the total volume that was traded that day was less than the historical volume as seen in the volume profile on the left.

We have provided a full list of stocks from April 2021(last updated) where these patterns occur we seen. A full list can be found here. See if you can spot the patterns described above. At least one of these patterns showed up every single day. We will update the list with more historical content soon. Subscribe to get notified when we upload new content.


Conclusion

In all these cases, having a good understanding of the psychology patterns and the mechanics of demand and support is a must for any trader. Technical analysis is only half the picture and it is the forecasts which give value to the technical lines. If no one is watching, the level has no meaning. We hope that the tools which are provided can help traders make better decisions.

We hope that we have demonstrated the importance of knowing how much volume will be traded. You can find the daily entries and exits using these strategies here or in the box below (Free membership required):


 

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Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser


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