Several years ago, I had the great opportunity of working with one of the best market makers ever. He started his career on Wall Street as a “chalk boy”, changing prices on a massive blackboard as he carefully negotiated a catwalk 40 feet above the NYSE trading floor. He formally retired as head of OTC trading for Goldman Sachs. Yes…you know…GSCO, the market maker that comes to the bid when we’re long in a day trade, and we breathe a sigh of relief.

He was seduced out of retirement to become head market maker for one of the firms I worked for as a retail broker. During my transition from being a broker to joining the SOES Bandits in 1994, he taught me how to make markets and read the “table.”

Now, completely retired from the industry, “Smokey” (his nickname) told me that Level II was nothing more than a high stakes poker table, and all you really need to do is look beyond the minutia and pay very close attention to the volume and where it goes.

In 1993, this didn’t make much sense to me. I was a financial consultant who looked at nothing else but fundamentals. After a hearty “Wall Street” lunch, we came upon a large group of people standing in a circle across the street from the NYSE. He asked me, “Jai, does that crowd interest you?” I replied, “Sure it does! There has to be a reason why so many people are standing there.” Smokey said, “I bet you all of those people are attracted by their greed.”

Sure enough, when we approached, it was a game of “3 Card Monty” being played on milk crates covered by a cardboard box. Smokey said, “There ya have it, Jai, volume (lots of people) and a sense of urgency.” We bet $10, won $20 and walked away.

As I continued to learn from this amazing mentor, I quickly realized that volume is one of the major keys to trading and investing, regardless of the time frame. He taught me how to read volume, not just on an intraday basis but also in all time frames.

“Price action is a by-product of volume, volume bias and urgency. Volume dictates price. The perception of supply and demand creates greed and fear. Greed and fear is the urgency. Greed and fear creates volume.”

It’s very easy to get caught up in the “noise” that makes you rethink your strategic and tactical plan. When I began using technical analysis in 1994, a brand new world opened up to me, I quickly realized that there was a great deal more to trading than a Level II window. The charts provide a history; “footsteps” if you will, that, when used with sensible indicators, paint a great setup.

Momentum analysis is not really discussed much in conjunction with strategies and methods. Many technicians do not embrace the study of volume and urgency and how they relate to price action. I, myself, found what I thought to be impeccable setups during my scans, only later to discover that I was shaken out or stopped out prematurely.

It’s a difficult thing to do, but I went back and analyzed each of those failed trades, and, when I applied momentum analysis, I saw a completely different picture. I have worked with this analysis since 1995, and I’m very fortunate to have had the patience to continue learning and applying it.

Volume, volume bias and urgency are very powerful indicators. Volume and its bias are easily quantifiable, but urgency is determined after the whole picture has been analyzed. Examples of urgent technical events are: A breakdown below a major support area, a breakout above a major resistance area, moving average (MA) crossovers, failed patterns, such as head and shoulders, triangles, pennants. When these events occur in the context of compelling news, the urgency and the root become very clear.

The best technical setup loses value and its odds of meeting target diminish if momentum is not present. My definition of momentum is volume x urgency (compelling technical event). I was able to cut down my scanning time by 50% when I looked at volume.

Volume is the lifeblood of any trading vehicle; it’s a true expression of interest. Whenever there is a drastic variation in the volume, it is an irrefutable indicator that a compelling event is about to unfold, and, if you know what to look for, you may find yourself positioned earlier than the average trader.

Here’s a method you can use to begin isolating many trading opportunities to a smaller yet qualitative breed of setups in eSignal 7.4:

Setting up the chart:

1) Click “File” in the menu bar.
2) Select “New.” Elect “Advanced Chart.” Select chart type. (I use candlestick.)
3) Right mouse button select “basic studies” and add “Volume.”
4) Repeat step 3 and add on “on balance volume.”
5) Right mouse button select “Formulas.” Select “Library.” Select “volumeMA.efs.”

This has added volume, on-balance volume and a volume moving average to your eSignal advanced chart.

Setting up the scan:

1) Click on “Scanner” in the menu bar.
2) Select “Power Scan” from the drop-down menu.
3) Configure:

• Scan Type = Heavy Volume.
• Sector, Issues, Min. Price, Max. Price, Min. Volume and Max. Volume parameters should be compatible with your Personal Trading Plan. I will discuss the Personal Trading Plan in another article.

4) Then, click “GO.”

From there, you can click on the chart images that appear in the first column on the left side of the symbol, and your chart is automatically populated with the data. Now, what you will find in every single one of these charts is a stock that has met many of the criteria for being a quality setup. Here are 3 of 19 eSignal Power Scan results I found:

As you can see from these charts (captured at the end of the day, October 13, 2003), there are amazing technical events in every one of them. It’s undisputable that they point to compelling momentum events. Look at:

The charts herein do not include other powerful technical indicators, such as an MA, stochastics or others as found in eSignal. I excluded them, so you can see the standalone power of the momentum indicators. Scanning for volume and then looking at the charts may help you narrow your focus to the plays that have attracted a larger interest.

There is a reason why volume has increased; what is that reason? We won’t know until it’s too late. We do know that the volume does not lie; every time shares exchange hands, it’s reported to the tape. Always remember that when the volume pattern has changed, that variation will have a direct effect on the price action.

Once you incorporate this form of analysis into your scanning, you may find yourself getting in and out of stocks before there is any news reported on them. I have done this many times and, very often, taken the opposite side after the news. Volume most often precedes news and always dictates price.

Being mindful of volume and momentum indicators, such as OBV and a volume MA, to name two of many, will prove to be a great “acid test” for your scans. There are some days when we have so many setups to choose from, and we’re really not sure which ones offer the best components. Then, we find ourselves in the wrong setups and missing the right ones. The markets are difficult enough, and choosing from among a number of setups for the great ones is something we’ll always have to live with, but the volume will lead us in the right direction.

Remember: Whenever you add a new tool to your trade (pardon the pun), apply it very conservatively until you become comfortable with it. Whenever I add something new to my Personal Trading Plan or analysis, I test, review, test, review and then apply. It will take time for any method or strategy to fit into your plan.

I’m sure you will find this way of looking at setups very valuable. If you have any questions, or would like to discuss this topic further, please visit me in the eSignal Central Bulletin Board at www.esignalcentral.com. May the trend be with you!

*This article is reprinted (and modified) with permission from Jai Ramoutar, Jr.