When mining for profits in your trading account, it usually doesn’t pay to hang your hat on just one or two indicators. I analyze a wide variety of clues to complete the entire puzzle, but there’s one that always enters into the analysis.

One of the most valuable and important pieces of the trading puzzle is volume. I’ve long observed (and this rule holds for stocks as well as commodities) that significant volume days often occur at turning points. For example, take a look at this chart of the cocoa market.

December 2004 Cocoa

www.commodity.com

The first thing you need to know is what constitutes significant volume. It certainly varies by market and also by the market phase and the news. Cocoa in recent years has generally seen trading of between 8,000 and 15,000 contracts on a typical day. On a very low volume day only 4,000 to 5,000 contracts will change hands. A 20,000-contract day is a big day, and a 25,000-contract day is significant.

The 45,000-contract day registered on the above chart in July 2004 stands out as a volume spike and certainly proved to be significant. In hindsight, that day jumpstarted a major move from about $1,400 per ton to $1,750 in less than a month, a move equivalent to more than $3,500 per contract traded.

Let’s take a look at a more recent example.

March 2006 Cocoa

www.commodity.com

In November 2005, cocoa had a significant volume spike--33,000 contracts--on a day the market actually hit new contract lows. There was no real evidence this market was making a bottom, other than this volume spike--which proved to be a prescient indicator. In effect, a buyer on that day with minimal risk had the potential for a $2,500 profit per contract within a few months. Plus, volume spikes occur not only at tops. Take a look at May 2003 cocoa.

May 2003 Cocoa

www.commodity.com

This 33,000-contract day in February 2003 looks like a giant redwood tree among saplings on the volume chart. As we now can see, the big sellers that day apparently knew it was time to cash in and/or go short.

I recommended buying cocoa last week in Futures Market Forecaster, my trading service. Volume was one of the reasons. Take a look at the May 2006 cocoa.

May 2006 Cocoa

www.commodity.com

While you won’t see one 30,000- to 40,000-contract day, there was what I consider some unusual activity: Three high-volume 25,000-contract days--March 8, 14 and 15--were recently registered. More than 75,000 contracts changed hands during these three days, more than double a normal three-day period. This is significant--combined with a potential breakaway gap, it constitutes the type of market action often seen at bottoms.

When it comes to the market, we’re certainly dealing with the unknown to an extent, but the clues are always there for those willing to do the work.

Good luck and good trading.

© 2006 George Kleinman
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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

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Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.