In today's lesson, we're going to look at the concept of volume. We will answer the questions: what it is, what it enables, and why it is another important element that will help us in our decision making process.
It is the value of transactions made in a given time. We can say that it is a measure of the intensity and pace of price movement and activity of investors on a given instrument. It is helpful in determining market strength and the advantage of demand or supply.
Why is volume so important in the decision making process?
Because volume allows us to determine moments of accumulation and distribution, it also gives us information about the strength or weakness of a moving trend. In an uptrend, volume should increase with price and decrease during corrections. In a downward trend, it will be the other way round, i.e. the volume should be higher when the price drops, but it will gradually decrease during corrections. It is worth noting at this point that an extremely large volume may indicate that large investors are getting rid of shares. The volume is used by experienced traders and is another additional information for them, which should not be omitted in the decision-making process.
Below, the price is marked with a purple rectangle and the arrow shows a clear increase in volume. Buyers have gained advantage over sellers:
In the following case, the volume started to grow (higher and higher red bars on the volume indicate an increasing supply). On 24th December at 16:00 hours, on the basis of the volume and a clear supply candle, we were able to conclude that the market is starting to be dominated by bears:
An OBV line is helpful in assessing the current trend direction. It is an indicator, which is based on the assumption that growth sessions are accompanied by accumulation, whereas declining sessions - distribution. Decreasing accumulation, i.e. decreasing turnover during growths, is often a signal of exhaustion of growth potential. The situation is similar for a downward trend. In case of OBV lines the size of numbers is not important, but the direction of the line is important. During OBV analysis it is possible to apply reaction to trend line or behavior of other elements of technical analysis (support, divergence). Below is an example of a redemption. Let's pay attention how high is the OBV line and how the green candles (marked with an arrow) look like - obviously the demand strength is decreasing.
Here we can see how the volume increased over 8 days - we were able to determine the upward trend line that the OBV indicator was moving. The day marked on the chart - January 5th - is the time when you can see a decrease in turnover, which may be the first of the signals of exhaustion of the upward potential.
In this case, it is also worth noting how important signal is given by the OBV indicator. Namely, the price is increasing, while the volume indicator is decreasing (such a situation is called a downward divergence), which is one of the reasons for the upcoming price collapse and increased supply on this instrument.
LOP is the number of open positions, and more simply, it is the number of contracts that are not liquidated by the end of the day, i.e. open contracts, remaining (*shorts and long contracts) at the end of the day.
Example: If LOP assumes the value of 50 thousand, it means that there are 50 thousand open long positions and 50 thousand open short positions.
As we well know, for a contract to come into being, you need two sides of the trade - the buyer and the seller. They create this one contract. When a new contract appears, the LOP increases and when it is liquidated, it decreases.
LOPs are used in the futures market, where the change allows to determine the attitude of investors and thus to predict the price movement. The subject of trading is not assets, but contracts for transactions to be executed at a specific date in the future. If the volume and number of open contracts increase, we can expect the trend to continue, and if it decreases, the current price trend is weak and we can expect its change As a curiosity, we can mention that examples of the first futures transactions can be found as early as in antiquity, where a clay tablet was found in ancient Mesopotamia. It was used as a contract for the delivery of slaves in the future with a flexible payment term. In case of non-delivery of the "goods", the seller was obliged to pay a corresponding amount of silver to the buyer as compensation.
*On the platform we can trade on the basis of short and long game, i.e. "betting" that the price of a given instrument will rise, while on the basis of short game