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Thursday, October 16, 2008

Interpreting Volume for the Futures Market (FKLI)



Interpreting Volume for the Futures Market By Zhuge Liang

Although many traders know how to use volume in their technical analysis of stocks, interpreting volume in the context of the futures market may require more understanding: considerably less research has been conducted on the volume of futures than that of stocks. Here we take a general look at some of the things you should know for looking at volume in the futures market.

The Beginning and End of the Day
It should be noted that volume is expected to be clustered on both ends of the trading day. In the morning, orders are entered into the market early as traders are reacting to overnight news and events as well as the previous day's data that is calculated and analyzed after the close. The end of the day is active due to traders juggling for position based on today's price movements. Closing price is typically the most dependable value of the day.

Chart Patterns
The volume of intraday trading displays typical chart patterns, such as a rounded bottom formation demonstrating lowest volume in the late morning when the traders take their breaks. The patterns of individual issues, however, may differ from these patterns. European currencies, for example, show more sustained high volume through late morning due to the prevalence of European traders in the markets at that time. To account for such patterns, compare today's 30-minute volume for a specific time period with the previous average volume for the same period.

Some rules of thumb for interpreting changes in volume and open interest in futures market are as follows:



:
1. A rising volume and a rising open interest are confirmation of a trend.
2. A rising volume and a falling open interest suggest position liquidation.
3. A falling volume and a rising open interest point to a period of slow accumulation.
4. A falling volume and a falling open interest depict a congestion phase.



Volume and open interest can be used in a practical sense to guide one's trades as follows:



1. Open interest increases during a period of an exhibited trend.
2. During the accumulation phase, volume may decline while open interest builds, but volume occasionally spikes.
3. Rising prices and a declining volume or open interest indicate a pending change of direction.


These rules, however, have exceptions, especially on days or at times when volume is expected to differ from the "norm". For example, volume is usually lighter on the first day of the week, on the day before a holiday, and during the entire quarterly period. Also volume may actually be heavier on Fridays and Mondays during a trending market. Liquidation of positions often occurs before the weekend, with positions being re-entered on the first day of the week. Finally, volume is heavier on a triple witching day, when stock-index futures, stock-index options and stock options all expire on the same day.

Conclusion
Volume and open interest are integral measures to guide one's trading decision on the futures markets, but as always, these indicators should be considered in relation to extraneous market events.

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