By: Shane Neagle

Price action is the dominant factor in trading, especially in futures trading. Price action is good, but price alone only tells half the story. You want to look at volume too because volume can play a crucial role in technicals, and can be argued that it should be viewed as one of the major factors in technicals. Volume is important because it communicates the level of market engagement or participation and can shade your understanding of the legitimacy or conviction of a move. Looking at volume in context can enhance your understanding of trends, breakouts, and reversals.

Understanding how to read volume analysis correctly is important for traders to confirm a setups strength/depth, avoid making mistakes or false move(s), and will help traders become aware of larger market participants. In this article, we will describe four potential ways where volume analysis can be utilized in futures trading with the goal of increasing confidence and accuracy in your trading decisions.

Confirming Trend Strength 

Volume helps us consider the strength of a trend. In futures trading a rising price with strong volume indicates strong participation in the market pushing price up with conviction. If volume is weakening while the price continues to rise, we may see some sign that momentum could be fading and the trend is nearing exhaustion.

This concept is especially relevant for traders using trend-following strategies—some of the most common futures trading setups. These include pullback entries, moving average crossovers, and trendline breaks. In each case, volume acts as a filter: strong trends are typically backed by strong volume, while weak volume may call the setup into question.

For example, let’s look at the E-mini S&P 500 futures (ES). If the price climbs without much pullback, but the volume each day continues to decrease. This is a potential issue, when you see price diverging from volume, you can determine that as less traders are participating in the move, you have a potential risk of pullback or reversal. A trader could take this action and say I am going to wait on entering a position until I see volume move higher, or raise the levels of my stops or reduce the size of my position.

When looking at what to include in the analysis of a trade decision, you should also use volume combined with other tools like moving averages or trendlines. For example, if the 20-period moving average is rising, and volume is above average during that time, that would add some confidence to a long position. If the price was respecting an upward trendline on the price chart, and volume was rising on the rebounds, that would also be supportive of the trend’s health.

For traders, using volume analysis along with technical structure is a good way to assess how much ‘juice’ there is behind the move. This process also helps traders avoid chasing after weak trends, and it provides better entry and exit timing, which are important competitive advantages for any futures trader who wants precision and risk management.

Validating Breakouts

A breakout occurs upon price moving beyond a well-defined level of either support or resistance typically signifying the beginning of a new directional trend. Breakouts create great opportunities for futures traders to enter fast directional trades, however, they should only be taken with confirmation via volume. A breakout can very rapidly reverse, trapping traders that initiated the trade too early, in what seems like becoming a trend.

Volume identifies true breakouts amongst false price motion. When price breaks out accompanied by strong volume, there are indications of strong participation and interest from institutional players as well as retail participants. That additional conviction shows the potential for continued motion in the breakout direction. On the contrary, when price pushes through a resistance level with little volume, signals may be identified that the breakout has no participation and is more likely to fail.

For example, we can take the Nasdaq futures (NQ) price that is generating consolidation patterns over several sessions that is creating a horizontal range. Price breaks higher above resistance and a volume spike was generated on that day – above volume for that time of day. Intuitively, buyers are supporting this price motion with conviction. This example is a better probability trade initially than a breakout that is initiated on either flat or declining volume.

Traders need to watch volume closely as the price reaches important breakout levels. If you experience a volume spike that correlates with bullish or bearish price action this can act as a confirmation signal. Things like volume histograms or time of day volume comparisons can help you filter out the breakouts you want to get into from the ones you might want to pass on. 

Most importantly, when traders apply volume to price action, they can avoid some of the common traps associated with breakouts. Futures traders will be able to time their entries better by waiting for confirmation in volume prior to entering a trade. This helps reduce whipsaw risk and increases the likelihood of capturing some sustained moves.

Identifying Reversals

Volume is a critical tool in spotting market reversals, particularly as extended trends are about to end. Volume can spike suddenly at protrusions into highs and troughs, allowing what we call volume climax to signal a transition in control between buyers and sellers. The sort of spikes that lead to patterns in these cases have to do with escalating market action, usually in the form of real panic buying at tops and fear-driven selling at bottoms. Volume surges can help as early indicators that a trend is running out of momentum.

Because of leverage and liquidity, volume-at-price-based reversals signals are extremely relevant for futures. For example, say crude oil futures (CL) put in a strong rally, which rises methodically over a lengthy trend, three+ sessions—we check in on the trend at the top for key volume hack.  Then, say, you pick up a strong volume surge next session. You’ll see it as something much higher in volume than the average daily session. If followed by a bearish engulfing candle, like in this example, this could represent exhausted buyers on a market peak such as this one. What that heavy volume reflects is a market with most of the buyers in, meaning limited to few participants to push prices higher, and opens the door for the possible reversal.

This configuration is known as an exhaustion volume. It typically occurs right at the top or bottom of a trend. Price makes one last run in the direction of the trend while volume is increasing, and then the price reverses to show evidence of a change in sentiment or trend. Sometimes, price will offer confirmation with a (bearish) reversal candlestick pattern (i.e. shooting star, doji, or engulfing bar). 

Traders can improve their rates of accuracy and rates of success by incorporating other tools (e.g. Relative Strength Index, RSI) together with volume analysis. A relative spike in volume, coupled with an questioned range in RSI (overbought/oversold), increases the probability of a reversal. The idea behind this combined approach is to better anticipate these potential turning points in the price cycle and help keep traders from taking trades just prior to, or during, a reversal in the market.

The combination of understanding volume climaxes and layering those in with price structure and momentum indicators allows futures traders to establish more timely exits and entries into the markets.

Spotting Institutional Activity

In futures markets, unusual volume activity is typically a good clue that there are institutional players—hedge funds, banks, and proprietary traders– on the other side of your trades. These players can issue orders sized so that their positioning can influence price movement on the instrument that they trade significantly more than you can. By seeing the footprint of “smart money” in the market, day traders can gain an advantage when anticipating significant market moves. Of course, this is even easier if one is a software dev, as they can build custom-made tracking solutions based on their own trading whims. 

One of the most recognizable signs of institutional activity is volume bars with massive volume but little price movement. When this occurs, it is a two-way market, and you can reasonably deduce that the huge players are absorbing either demand or selling interest with little impact on the price. The ES futures market, for example, may show some massive volume bar with a relatively narrow range on the day it occurred. This fact can lead to a pretty good idea that institutions were absorbing orders at a significant level. This type of behavior will usually precede breakout directional moves. 

Finally, using a volume profiling tool sets the stage to view traded volume at price instead of over a specified time. Volume profiles help to determine high volume areas (high volume nodes) which tend to be support and resistance points that cannot be seen by the naked eye and are driven more by institutions or smart money. In contrast, low volume areas tell traders where price may move quickly, since there are few participants. 

Time-of-day trends in volume can also be helpful. Generally, institutions will sometimes engage market activity during the more liquid hours available to them such as the first and last hour of the U.S. trading session. Therefore if you can identify volume spikes during these periods, it can help traders delineate the difference between ordinary market activity and additional liquidity involvement into the market. 

In order to recognize and monitor this behavior, traders can take advantage of footprint charts, market depth, or even volume-at-price overlays that visually display volume per price and where large market orders are interacting. 

If traders can define these unimportant clues and time their trades in order to participate alongside the institutional action versus against institutional action, this improves the timing, accuracy, and quality overall of the trade.

Conclusion

Volume analysis is important and powerful, yet despite its many advantages, it is underutilized in futures trading. Volume tells traders how much strength is behind price moves, therefore being able to confirm breakouts and “Big player” turning points.

Simply adding volume to a trader’s analysis will improve setup quality, allowing traders to break the habit of following price solely on its own. Volume may help you confirm a trend, confirm a breakout, help identify the top or bottom in a reversal, or help find institutional activity. Volume allows the market to provide some context in order to trade more effectively.

Understanding how to look at volume alongside price is essential to creating a stronger trading method. When volume is used with other technical tools, like MA’s, RSI, or volume profile, volume becomes an integral part of trading decisions in fast-moving futures.