A couple of weeks back, two red-shouldered hawks moved into our neighborhood. Now these are beautiful birds, large, colorful, and quite chatty with their loud voices. We like to see these hawks moving in because ground squirrels are mainstays in their diet. This is good because those pesky squirrels leave hoof-sized holes in the paddocks, which is dangerous for our horses. Funny thing, though, we like it, but many of our neighbor birds do not like it. In fact, when the hawks arrived, the noise level in our little forest dropped more than few decibels. It would seem that the doves, jays, and even the crows are afraid of the hawks, and so they split. The leaving of these medium-sized, full-throated birds has left more feed for the smaller birds, so now we have more opportunistic wrens, finches, and sparrows wandering around on the ground. They flutter down, peck quickly, here and there, and then they quickly flutter away.     

You have mentioned in past articles the importance of volume. What exactly do you mean? Why is volume important?

In the markets, when something fearful or uncertain happens, investors either flee or hold back investment dollars causing volume to drop (assuming no panic). When this happens, the omnipresent traders become more apparent as they peck” around, and then “flutter” away. This is one reason volume is important – low volume gives the traders more sway over the market. The past few weeks are a case-in-point. Traders have moved the market up and down (intraday) on low volume. Recognizing this reality helps one formulate a better trading strategy, one designed around quick trades.

The opposite side of this is when the uncertainty or fear goes away, money begins flowing back into the markets  causing volume to rise. The traders, although still in the markets, lose their visibility and their sway over market flow. The noise level rises, and big trades move markets on big volume. Price action increases and more trading opportunities come into view.

High volume can mean tradable price action, more liquidity, and greater opportunity to get in and out of a trade. Low volume can mean volatility, low liquidity, or flat line trading. All present opportunity, if you design a strategy for the volume levels.

High volume can also create panic or irrational exuberance, depending on the emotional tenor of the market participants. Low volume can create a malaise or lack of interest, which can create tight, range-bound markets, which can be difficult to trade.

In any case, the trading ecosystem is dynamic, and paying attention to volume can tell you who is playing what and where, as well as how much those players are consuming. Understanding this can assist you in your trading endeavors. You can either fly away and come back when things stabilize or you can flutter in, pick up a few seeds and flutter away.

Trade in the day; invest in your life …

Trader Ed