Discussing the article: "Developing a Trading Strategy: Using a Volume-Bound Approach"
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Check out the new article: Developing a Trading Strategy: Using a Volume-Bound Approach.
In the world of technical analysis, price often takes center stage. Traders meticulously map out support, resistance, and patterns, yet frequently ignore the critical force that drives these movements: volume. This article delves into a novel approach to volume analysis: the Volume Boundary indicator. This transformation, utilizing sophisticated smoothing functions like the butterfly and triple sine curves, allows for clearer interpretation and the development of systematic trading strategies.
At its core, volume is simply the number of trades or contracts exchanged during a specific period, whether it be 5 minutes, 1 hour, or a full trading day. It acts as a measure of activity and certainty, answering the "why" behind price action.
High Volume: A price movement accompanied by high volume is considered strong and likely to continue. It signifies broad market participation, giving the move credibility and force. For example, a stock breaking out of a consolidation pattern on high volume is a much stronger signal than the same breakout on low volume.
Low Volume: Conversely, a price move on low volume is viewed as weak and potentially unreliable. It suggests a lack of consensus and may reverse quickly, as it doesn't have the support of the broader market participant base.
While numerous indicators like the Market Facilitation Index (MFI), On-Balance Volume (OBV), and the Accumulation/Distribution attempt to incorporate volume, they often present derived or cumulative values that can be difficult to standardize. Our goal is to work with volume more directly by first constraining its infinite nature into a predictable, bounded range.
By integrating volume into analysis, traders shift from simply observing what the price is doing to understanding why it is happening and how strong the move is.
Author: Daniel Opoku