Technical Analysis.

Frequently Asked Questions

System FAQs ||| Strategy FAQs ||| Technical FAQs

We receive a great number of questions dealing with our trading system. In order to help you better understand our trading system and approach, we have selected and addressed the most commonly asked questions below. We hope this will help you in your trading.

Technical Analysis

• What do you mean by "VMA"?
   
• What is a 'VMA spike to the upside' (resistive volume)?
   
• What is a 'VMA spike to the downside' (supportive volume)?
   
• How do you evaluate the significance of a volume spike?
   
• Why do you sometimes initiate a trade only on a recent volume spike, when in fact there was already a previous spike, which seemed just as important?
   
• In last week’s “Best Trade”, you left a trade open. Why was this not the case this week?

What do you mean by "VMA"?

“VMA” stands for “Volume Moving Average”, a key indicator we use abundantly in our charts and technical analysis. The VMA refers to the volume of a security, commodity, or index averaged over a given period of time. The intervals used in calculating a particular VMA can be as short as a few minutes or as long as several years. In calculating a VMA, we use a so-called “simple” moving average, where as the newest value is added, the last variable of the series is simply dropped, and where all values are given equal weight. For example, a 5-minute moving average consists of the last five volume bars, each representing the volume activity of one minute. In order to calculate a simple moving average, all the values are summed up and then divided by five. After the next minute has elapsed, a new value is added to the 5-minute VMA, and the oldest value is dropped from the calculation.

What is a 'VMA spike to the upside' (resistive volume)?

Simply put, this means that most of the volume activity in the spike took place as the index was moving up.

What is a 'VMA spike to the downside' (supportive volume)?

Simply put, this means that most of the volume activity in the spike occurred as the index was moving down.

How do you evaluate the significance of a volume spike?

To put the magnitude of a volume spike in perspective, it is essential to consult charts that span various time periods. For instance, while a particular volume spike may look imposing (and therefore seem critical) on 1-day or 5-day chart, that same spike may not loom as large on a 30-day chart, and it might even seem insignificant on a 60-day chart. Volume spikes that appear noteworthy on short-term charts must therefore always be placed in the context of the higher time periods so that misinterpretations of their potential impacts on mid- or long-term trends can be avoided. For instance, a prominent spike appearing on a 5-minute chart could well affect an index in the short- term, but it may not necessarily have much of an impact on the prevailing long-term trend.

Why do you sometimes initiate a trade only on a recent volume spike, when in fact there was already a previous spike, which seemed just as important?

To answer this question, we invite you to access our historical charts and scroll back over the last 6 months of data. You will see that the price does not always react immediately to the appearance of a significant volume spike. Rather, you will find quite frequently that time lags exist between volume spikes and their ensuing price reactions. Price reversals often take place only on the second or even third volume spike, and the volume surges at this stage may not necessarily be as pronounced as they were on the first spike.

In our trading, we frequently ignore the first occurring volume signal, anticipating that a later signal will provide us with a better entry point. Often, this is exactly what happens. It is for this reason that we promote our historical charts; they can provide valuable information (i.e., context) for the analysis of a particular market situation”

In last week’s “Best Trade”, you left a trade open. Why was this not the case this week?

This week, we did not receive a strong volume signal that would have prompted us to leave the trade open. We would like to remind you that options trading is very risky. We believe it is often better to make fewer trades and to initiate trades only in the presence of strong, unambiguous signals.