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Alan Box: da $1M Manual
Ana Libri Press
Ok, so I'm obsessed with volume. Being as there are no support groups to cure this, it's easy to just indulge myself, and torture anyone who enters my world.
Contents
- What are Volume Bars
- How do Volume Bars Work
- Fluid Bars vs. Jagged Bars
- What Size to Use
- Backfill
- Determine Equivalent 1m-Bars
- Closing Example
Volume-bars are considered momentum bars, as are tick bars and range bars. Volume bars print OHLC not as each minute passes by, but as each measure of the volume-value selected passes by.
Perhaps the two most important features of any momentum bar are
(1) Long periods of congestive action are compressed
(2) Short periods of fast action are expanded.Traders can use this to their advantage by early detection of momentum and congestion.
Volume is commitment: price will not move without it. Mind you, it can be miniscule volume, but at least one contract must trade for price to print.
Trader commitment is not necessarily time-dependent. For instance, on thinly traded stocks, days may go by with but a few shares traded. A volume-bar chart can, potentially, compress hours or even days into a single bar. Conversely, during an emotional exchange, there may be scores of bars within but a few minutes.
Like regular minute-based charts, market structure will make itself known on volume-bar charts: pivots, moving averages, divergences, and all indicators "work", as do trendlines, forks, Gann fans, cycles, and other fractal measure such as waves, geometric retracements and projections. The proof of the pudding is in the eating, do your own validation and find out for yourself.
Volume bars are assembled by collecting ticks. Each tick consists of OHLC and Volume. Ticks are collected until the volume aggregated equals the size selected for the volume bar. Ensign has the option to take any volume "left over" from the last tick queried and use it to start the next volume bar. Thus, each volume bar truly contains exactly the volume intended.
Here is a subtlety to consider: difference between tick bars and volume bars. A tick bar literally collects ticks. One tick could consist of 200 contracts (or shares) of volume, or one contract (or share) of volume. So while the speed of the market is captured with tick, the volume within that speed is still masked. Because volume is, to me, as important as price, I favor the volume bar versus the tick bar. Range bars are another topic for another day.
This difference brings up the fact that volume for volume bars is constant. Thus, volume-based indicators behave curiously. I won't say they don't work, but remember that the input for for volume is a constant number so indicators that look for volume changes will be using a constant rather than variable value.
An alternative measure for "volume" on volume-bar charts is tick-count. Again, there are some curious behaviors here too. A large number of ticks can be considered a mark of the small trader, ie, loads of trades with little volume, often a sign of a reversal if one believes 'the masses are usually wrong'. Also interesting is when there is a small tick relative to the surrounding ticks, ie, a sign of a larger block, or 'smart money'. This too is a future discussion topic.
Generally, more bars in less time: momentum; fewer bars: congestion. There can be exceptions to this as I will show later.
In the example below. when 300 contracts are collected, a new bar is created. When commitment is high, the "look" of the volume bars will be very smooth and fluid. Alan Kelland might call them "follow-through" bars: with each increment in price, there is follow-through of increasing interest.
When price starts to get jagged, it is likely congestion, ie, no follow-through, which in volume terms is accumulation or distribution depending on the the greater drift of price.
To illustrate the variable time aspect of volume bars, the Color Band below price shows increments of 4-minutes. Here is the Ensign Study for Color Band Study I used. The pull-down menu allows other selections, such as hours, days, etc.
Too large a volume bar and there is very little movement as few bars are collected for each day, sort of like using a 60m chart which plots only 6 or 7-bars per day, which while being informative, is slow to give day-trading signals.
Too small a volume-bar size will yield many bars with with an equivalently small time frame, perhaps even less than 30 seconds per bar. Not only will you see more 'flat' action, literaly bars that look like dashes as a large tick of 500 contracts is broken up into smaller volume chunks, but the movement will at times be extremely jagged (see below). I don't dismiss small volume sizes out of hand, but realize that, like trading a 1m chart, the price-noise is higher and trader reaction times must not only be lightning fast, but you must have a temperament that doesn't stress-out. The example below exaggerates the effect to make a point.
A rule of thumb I use to determine what sizes are useful for my day-trading is to use volume bars that are *roughly* equivalent to 1m, 3m, 5m, or 10m charts (or any other value that suits your trading).
I use "all Sessions" for my volume charts. The Globex overnight session tends to make a small number of bars compared to the day session, but more importantly, keeping them provides continuity of price action when there is dramatic movement overnight.
Ensign uses DTN to backfill beyond IB's intraday-chart limitation of 15m and 33m. The DTN backfill is limited to 100,000 ticks.
If you select a high-volume-bar, this may, initially, produce a chart with only a few bars (see image below). As data is collected, the number of bars will increase. Remember, though, if you miss a few days of data collection, the backfill (for large volume bar values) may not be sufficient to reach all the way back to the last data bars collected and your chart will end up with 'holes' in it.
How to determine 1m-equivalent Volume-bar size
(1) Determine how many minutes in the regular trading hours (RTH) day. Even for the ES, the Globex volume is miniscule compared to the RTH volume. For instance, the Russell e-mini trades from 9:30-4:15 RTH. This is 6.75 hours or 405-minutes.
(2) Determine how much volume is traded each day. CME and ECBOT post the data daily, or, you can build a Daily chart and use Ensign to calculate the averages.(3) Take at least two moving averages, 5d and 20d, for instance, of that data.
Here is a simple DYO Template
[right click & save in Ensign Template folder]
It will look like the images below, but without the cycle tool showing 20-days.(4) Divide the smaller average volume by the total RTH minutes. In this example, it is the 20d value:
Avg Daily Volume (ADV) 128,167 RTH minutes 405 ADV/Minutes 128,167 / 405 = 316 Volume Bar Size Rounded 300 Volume Bar Size
for 1m equivalent(5) In triple screen trading, the next time frame is typically 3x or 5x the lower time frame:
Time Frame Volume Equivalent 1m 300V 3m 900V = 300V x 3 9m 2700V = 900 x 3
Here is another example of price action vs. the variability of volume bars printing each day.
On the first day, the average daily volume was closer to 128K, as in the calculation above, so a 400V bar was a 1.6m equivalent. Curiously, the vol bars per hour were quite similar throughout the day, but indicated different price action as the day progressed.
On the second day, which had higher average daily volume than usual, the 400V bars were nearly equivalent to a 1m bar, except during the very fast action from 9-10am.
You don't need to change your volume bar settings on a daily basis, but keeping tabs on the Average Daily Volume and whether you are printing more or fewer bars than 'usual' keeps you in tune with the pace of the market.
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