Saturday, September 19, 2009

Looking Through the Market Telescope and Microscope

In my recent post, I explained how denominating bars by volume rather than time can be useful for traders. GlobeTrader offered the excellent observation that solely looking at volume-denominated charts would make it impossible to compare one instrument to others, since each would be forming its own idiosyncratic bars. Indeed. That is why I find it necessary to watch time-based charts for the various indexes and sectors along with the volume-based chart for ES. The former tell me about confirmations and non-confirmations; you can think of it as a market telescope. The latter delves into the volume flow dynamics of the single instrument I'm trading; it's the microscope.

One of the cognitive challenges of trading is coordinating perspectives from the telescope and microscope: seeing the forest *and* the trees.

It's when the patterns under the microscope confirm what you're seeing in the telescope that you can execute well on the big ideas. Those are the trades that make your day or week, when The Force is truly with you.

I'll give an illustration shortly.

Hat tip to Torley, who knows a thing or two about The Force.


Matt Fahmie said...

Monthly-Weekly = Forest
Daily = Patch of trees
30 Minute = Tree
Volume based or Tick Reversal = Roots of tree

At least for me. I understand the logic behind using a volume based chart. Though quantification of which volume setting work best relative to each instrument I believe is needed.

Your thoughts?

john e said...

Volume for me reveals the foot prints of the market makers.
In India there is a saying "When the elephant walks, The dogs bark....................."
Just listen to the pit noise and watch the volume.

MikeS said...

What about tick-based charts? Do you think they're equivalent to volume-based charts?