Interpreting Volume in the Futures Market

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Interpreting Volume in the Futures Market

Although many traders understand how to utilize volume in their technical analysis of stocks, interpreting volume in the context of the futures market may need extra knowledge due to far less study on futures volume than on stocks.

In this section, we will take a basic look at some of the factors you should be aware of while looking at volume in the futures market.

Key Takeaways

  • Futures traders may use trading volume to get significant insights that demand more expertise than stock price charts.
  • For certain futures contracts, for example, tick volume is a superior tool for estimating intraday activity.
  • Open interest is also a volume measure of liquidity and the amount of money traders have at stake in a certain underlying.

Volume Reports and Liquidity

The volume of each futures contract (when individual contracts specify regular delivery months) is often published alongside the market’s overall volume or the aggregate volume of all individual contracts. These volume numbers are released one day after the trading day in question, however projections are given throughout the day. Estimates for some contracts may be issued as often as hourly.

The most fundamental use of volume in futures markets is to compare it to liquidity. Futures traders will get the best execution fills when there is the most liquidity, which is during the delivery month with the most volume. However, when contracts shift from a second month out to the nearest delivery month, traders transfer their holdings to the closest delivery month, generating a natural rise in volume. Volume, on the other hand, decreases as the delivery date approaches. Looking at simply one delivery month’s volume provides a one-dimensional view of market activity.

Looking at Total Volume: Tick Volume

Traders must assess the aggregate volume of all contracts to provide their analysis with more than one dimension. Total volume measurement will balance out the patterns of growing and decreasing participation depending on the arrivals and departures of specific delivery months.

  An Overview Of Futures

In the stock market, total volume is calculated by adding the volume of all stocks in a comparable group, maybe for a certain industry group. This smooths out the occasions when the volume of a single contract was very low.

Because entire volume may not be available on the futures market right once, even as an intraday estimate, tick volume is used as a replacement. Tick volume is the number of price changes that occur independent of volume at any particular time frame. The reason tick volume is related to real volume is because when markets grow more active, prices fluctuate more often.

In the case of a chart with 30-minute volume patterns, for example, the tick volume of each interval (the number of ticks throughout the 30-minute period) may be compared to the starting tick volume and recorded as a percentage of the original tick volume. This provides a daily baseline volume to which all future ticks may be compared.

Volume Clusters on the Ends of the Trading Day

It should be noted that volume will be concentrated at both ends of the trading day. Orders are put into the market early in the morning as traders respond to overnight news and events, as well as the previous day’s data, which is calculated and reviewed after the close.

Due to traders jostling for position depending on the day’s price fluctuations, the end of the day is usually lively. The closingprice is usually the most consistent figure of the day.

Understanding Chart Patterns

Intraday trading volume exhibits traditional chart patterns, such as a rounded bottom formation, with the lowest volume in the late morning when traders take their breaks. Individual problem patterns, on the other hand, may diverge from these patterns.

  Using Pivot Points for Predictions

Because of the preponderance of European traders in the markets at that time, European currencies, for example, display more continuous high activity into late morning. Compare today’s 30-minute volume for a given time period to the prior average volume for the same period to adjust for such tendencies.

Interpreting Volume Using Open Interest

Open interest is the number of players in the futures market that have outstanding transactions. The net value of all open positions in a single market or contract represents the depth of volume that is achievable in that market. A market with a low number of contracts traded each day but a significant open interest indicates to the trader that there are many players who will only join the market when the price is correct.

New buyers or sellers enter a market when there is new interest, which raises the value of open interest. When open interest rises in tandem with a comparable rise in prices, more traders are likely to initiate long positions. That being said, for every new purchase of a futures contract, there must be a new selling, although the seller is likely to be trying to maintain a position for a few hours or days, expecting to benefit from market movement ups and downs.

The position trader is responsible for the open interest, but he or she is ready to keep the long position for a much longer amount of time. If prices continue to rise, longs will be able to retain their positions for a longer amount of time, while shorts will be driven out of their holdings.

The following are some general guidelines for analyzing variations in volume and open interest in the futures market:

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  • Increased volume and rising open interest are signs of a trend.
  • Rising volume and declining open interest indicate position liquidation.
  • A drop in volume and an increase in open interest indicate a time of gradual buildup.
  • A congestion phase is represented by dropping volume and diminishing open interest.

Volume and open interest may be used to advise transactions in the following ways:

  • During a time of an observed trend, open interest rises.
  • Volume may fall throughout the accumulation phase as open interest grows, although volume sometimes rises.
  • Rising prices and diminishing volume or open interest suggest a potential shift in trend.

These guidelines, however, contain exceptions, particularly on days or times when traffic is projected to diverge from the “average.” For example, volume is often lower on the first day of the week, the day before a holiday, and during the summer. Also, during a trending market, volume may be higher on Fridays and Mondays. Positions are often liquidated before the weekend, with positions re-entered on the first day of the week. Finally, on a triple-witching day, when stock-index futures, stock-index options, and stock options all expire on the same day, volume tends to be higher.

The Bottom Line

Volume and open interest are important indicators to use when making trading decisions in the futures markets, but they should always be seen in context with other market developments. To acquire the most accurate picture of market circumstances, take into account as many variables as possible.

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