An introduction to trading stock options and index futures using volume price analysis

An introduction to trading stock options and index futures using volume price analysis

In this video from the US trading session I introduce some of the concepts of stock options as the US futures continue to trade in a narrow range. David explains how to short stocks such as Kellogg (K) which is one we have had on the watch list for some time.

00:10

Welcome and session introduction

00:10

The speaker welcomes everyone to the afternoon session, acknowledging attendees from various locations including the UK, US, and Canada. They mention that a colleague named Davis has briefly stepped away and that the session will start officially once he returns.

00:42

JOLTS job openings and employment data

00:42

The speaker introduces fundamental economic news focusing on the JOLTS job openings report released at 3 PM, which measures job vacancies excluding farming. Despite poor recent Non-Farm Payroll (NFP) numbers, employment remains a key priority for the Federal Reserve, emphasizing the importance of monitoring these figures.

01:16

The discussion continues on the JOLTS data, noting the job openings number has remained relatively stable. The speaker explains using Forex Factory and similar tools to visualize fundamental economic releases in graph form, helping traders interpret trends similarly to technical charts, thus enhancing understanding of market dynamics.

01:52

The speaker illustrates how to read fundamental news like JOLTS as a trend, highlighting past rises and the sharp pandemic-related decline. Combining this data with unemployment rates provides valuable insight into the economy’s health, applicable across trading markets including forex, stocks, and commodities.

02:29

The importance of tracking fundamental news is emphasized, as it offers a broader context for economic conditions. For the U.S., the Federal Reserve’s dual mandate includes employment and price stability, meaning employment figures heavily influence monetary policy decisions, which traders need to anticipate.

03:06

Additional news sources such as Financial Juice and Investing.com are recommended for keeping up with economic releases. These platforms provide timely information that is crucial for traders to stay informed about market-moving events, even if the news may not seem directly relevant at first.

03:41

The speaker notes the affordability and utility of subscribing to quality news feeds, highlighting their role in effective trading. They also invite participants to ask questions during the session via chat for clarification or further explanation, fostering an interactive learning environment.

04:17

The session formally begins with a focus on U.S. markets from a day trading perspective, covering stocks, indices, and currencies. The speaker reminds viewers to observe the disclaimer and practice responsible trading, acknowledging the risks involved and stressing the educational nature of the content.

04:53

A cautionary note is given about the risks of trading and the importance of only using capital that one can afford to lose. The speaker clarifies that the session is for educational purposes, not financial advice, and briefly mentions technical difficulties with slide presentations before moving on to the next topic.

05:22

Volume Price Analysis methodology overview

05:22

The speaker introduces volume price analysis (VPA) as a framework for technical analysis, mentioning that many attendees are already familiar with the methodology. The associated book, which has become a bestseller, is available in multiple languages including simplified Chinese, Taiwanese, Japanese, and Vietnamese. It has recently surpassed a thousand reviews, highlighting its growing popularity and impact among traders.

06:26

The VPA book is complemented by a companion guide featuring practical examples across indices, stocks, commodities, and forex markets. The methodology relies on recurring patterns and signals in historical charts, which persist because traders’ behaviors tend to repeat over time. VPA helps identify market manipulations driven by emotional swings, such as euphoria, complacency, panic, fear, and greed, enabling traders to take informed actions.

07:37

VPA integrates volume, price action, and candlestick patterns to analyze market behavior. Although the approach dates back nearly a century, candles have become dominant over bar charts among traders. The methodology emphasizes specific candle configurations that work well with volume and price signals. It also focuses on support and resistance levels, both price-based and volume-based, which are essential to interpreting chart structures.

09:18

Support and resistance can be marked on charts in various ways—manually or using tools like Fibonacci or Camarilla levels—according to trader preference. These are considered primary tools, while indicators, including proprietary ones, serve as secondary tools. Time and multiple time frames are overarching factors in analysis. The speaker then briefly shifts to current market conditions, mentioning a 10-year bond auction and noting that economic optimism depends on resolving ongoing global and political challenges.

10:47

The discussion touches on the broader context affecting markets, including the pandemic and political uncertainties in the US, especially the period leading up to the presidential inauguration. The speaker expresses hope for calming emotions and a more stable environment for trading and economic recovery.

11:20

Nasdaq two-bar reversal and market weakness

11:20

The speaker discusses the market’s sharp sell-off at the open, focusing on the Nasdaq’s performance. They analyze a two-bar reversal candle pattern on the Nasdaq’s daily chart, highlighting it as a sign of market weakness. This pattern, resembling a shooting star, suggests potential partial or complete reversal in price trends.

12:30

Examining the volume beneath the two-bar reversal candles, the speaker notes significant buying activity despite the market’s fall, indicated by the candle wicks and volume levels. Technical difficulties with the machine are mentioned, but the analysis confirms that the market showed recovery attempts after the initial drop.

13:42

Despite the intra-day fall, the market (specifically the Nasdaq) managed a strong recovery, pushing to all-time highs. However, the speaker expresses concern over the subsequent volume and candle range, implying that if the market were truly poised for a strong rally, higher volume and wider candle spreads would be expected.

14:18

The two-bar reversal pattern is reiterated as a strong indicator of market weakness, especially on faster time frames, potentially creating good trading opportunities. The speaker cautions that this does not guarantee an immediate market rollover and that upcoming days will reveal the depth of this weakness. The analysis considers the broader context, including ongoing political and virus-related uncertainties.

14:52

The speaker discusses the possibility of a market bounce or further confirmation signals, such as a hanging man or another shooting star candle, before a clearer trend emerges. The analysis is framed within the uncertain background of the pandemic and U.S. political situation.

15:26

The speaker advises maintaining a neutral mindset despite bearish technical signals like the two-bar reversal and volume indicators. While these suggest weakness, one should avoid premature selling, as markets can be unpredictable and may not immediately follow through on reversal signals.

16:02

Volatility is highlighted with examples of rapid price moves and hammer candles that indicate buying pressure. For day traders on faster time frames, these signals are important despite an overall bias toward downside risk. The speaker emphasizes that markets resist falling without significant catalysts.

16:38

The market’s reluctance to decline without major news is noted, referencing the large sell-off in March of the previous year. The speaker introduces a free resource, Bar Chart, for intraday stock traders, expressing surprise and appreciation for its continued usefulness after many years.

17:19

Impact of options trading on markets

17:19

The speaker explains that although the website looks old-fashioned, it contains valuable information, particularly about the surge in stock options trading. Since last year, there has been a significant increase in day traders entering the market, driven by mobile trading apps like Robinhood and Interactive Brokers. Despite criticism that these platforms have gamified trading, many new traders have gravitated directly toward options trading.

18:29

Options trading, once considered exotic and mainly for institutions or hedgers, has now become popular among retail traders. This influx has created distortions in the market due to the heavy volume of call options being traded. The speaker advises stock traders and those interested in market sentiment to monitor the ratio of calls to puts, which can provide insights into trader positioning.

19:43

The speaker highlights a tool called BarChart that tracks option volume and the call-put ratio for stocks, ETFs, and indices. They mention Dave Portnoy, a figure who popularized day trading during the pandemic lockdowns, attracting many new retail traders who were furloughed and unable to spend money on entertainment. This influx of retail money into the options market has caused various market issues but illustrates current trading dynamics.

20:48

The retail trading crowd often lacks traditional chart analysis knowledge, instead relying on collective trading groups on platforms like Discord. These groups coordinate buying calls or stocks such as Tesla, Apple, and Ford, often driving significant price moves. The speaker suggests that intraday traders pay attention to the presence of options activity in stocks they trade and use tools like BarChart to assess put-call ratios.

22:29

The speaker briefly shifts focus to the Nasdaq, noting its slow upward movement supported by a hammer candle pattern. They mention having multiple chart views (minute and three-minute) to analyze market behavior, indicating a technical approach to understanding short-term price action.

23:02

Intraday market structure and volume analysis

23:02

The segment discusses recent market activity highlighting a fall followed by consolidation and a potential breakout from the volume point of control. The speaker explains the importance of support and resistance, both price-based and volume-based, emphasizing a bullish engulfing candle and significant volume influx. They note that price movements are rarely linear, describing a consolidation phase with strong buying interest beneath key levels, setting up for a possible breakout that contradicts the daily two-bar reversal bias.

24:03

This part focuses on technical analysis using two-bar reversals and the volume point of control, which marks balanced volume and defines support and resistance limits. The longer price consolidates around this point, the stronger the subsequent move once a breakout occurs, illustrating Wyckoff’s second law. The speaker introduces the accumulation and distribution indicator’s hatch lines and transitions to discussing the euro-yen pair, noting its prolonged congestion and the challenges it presents for trading due to its sideways movement.

25:15

The euro-yen hourly chart remains stuck in a congestion zone bounded by key support and resistance levels, specifically between the S3 and S2 levels of the Camarilla indicator. The speaker highlights the importance of knowing these levels for setting stops and targets. They explain that the pair must break above S2 or fall below S3 to signal a directional move. Currently, the currency strength indicator shows all relevant currencies moving in unison, contributing to the ongoing congestion and indicating that taking trades against this range is unwise.

26:35

The discussion shifts to intraday trading conditions on the YM and other indices using NinjaTrader, examining multiple timeframes from 15 seconds to 15 minutes. The speaker notes a recent divergence in risk sentiment where the ES and NQ sold off more sharply compared to the YM, which recovered after an initial drop. This divergence has resulted in narrow, razor-thin price action ranges across these markets, reflecting a cautious and tightly contested trading environment at present.

28:19

Volume point of control and market congestion

28:19

The discussion focuses on trading indices, emphasizing the need to move to faster time frames due to market congestion around volume points of control. These volume wedges act as critical support or resistance levels. Price tends to move quickly through areas of low volume, likened to flying through thin clouds versus thick turbulence. Volume-based support and resistance are complemented by price-based indicators like the accumulation distribution indicator, which highlights levels tested multiple times, indicating their strength.

30:23

Strong price levels are identified through clusters of tested price points, which provide solid support or resistance. Trading on multiple time frames, such as 5, 10, 15, or 30 minutes, helps confirm these levels. The MT45 indicator differentiates strong from weak zones with solid and dashed lines. Current market conditions show sideways movement with some established support platforms, indicating a period of congestion rather than strong directional momentum.

32:21

Market sentiment is influenced by currency pairs and risk proxies. The Australian dollar is rising due to falling US dollar index and a minor rally in the Aussie yen, signaling a risk-on environment. The Japanese yen acts as a risk meter, with its strength or weakness indicating risk-off or risk-on flows. Volatility indices and multiple currency pairs provide insights into underlying market risk and momentum.

33:53

Multiple time frames from 15 seconds to 15 minutes show that faster charts are essential for trading in this congested market environment. Slower charts may lag and cause missed opportunities as price reversals occur rapidly. Volume profiles reveal strong resistance at the volume point of control with volume falling off above it, suggesting potential for quick price moves if resistance is overcome. Trend monitors indicate a recent transition from bearish to bullish momentum, but price struggles to break key resistance levels.

35:26

Price action shows hesitation around resistance areas with mixed volume signals. Candles with wicks and low volume suggest weakness and a possible market rollover. The market is currently sluggish, entering a congestion phase with minor support platforms. Volume price analysis applies across all time horizons, highlighting the importance of watching price and volume interactions closely to anticipate trend changes.

37:25

Analyzing different time frames confirms a mixed trend with short-term bearish signals and pivots indicating weakness. The trend monitor remains bearish on the one-minute chart with no clear bullish transition. Price moves quickly through low volume areas but faces resistance at higher volume nodes. The trend monitor’s color changes assist in identifying trend strength and possible reversals, supporting the goal of maintaining positions in clear trends.

39:04

Volume is building at key resistance levels, with the trend monitor helping traders stay aligned with the prevailing trend. Although there is some bullish momentum, the overall market remains fragile and lacks strong conviction. Volatility triggers and volume point of control levels indicate a market prone to congestion and sideways movement rather than decisive trends. Using multiple indicators helps in assessing the market’s strength and timing entries.

40:36

Strong intraday trends occur when multiple risk factors align, including movements in the yen, dollar, and volatility indices. Currently, the market is sideways and lacks strong directional moves, seen in patterns like two-bar reversals signaling weakness. Traders are advised to focus on very fast time frames for active trading or to remain patient and set levels carefully while waiting for clearer trend signals.

41:36

Key levels for potential breakout trades are identified by low volume zones and strong support or resistance clusters. Monitoring these levels across multiple time frames helps in setting entry and exit points. The market is currently trading in a buffer zone around the volume point of control, characterized by volatility and congestion. Patience is necessary as price consolidates, with traders advised to watch for volume drops and price action to signal the next directional move.

43:34

Currency futures and major pairs show varied momentum, with the British pound notably strong on the 30-minute chart despite the broader sideways market. This strength is unusual and highlights the importance of monitoring key currency pairs to gauge market sentiment and potential directional shifts within a generally congested trading environment.

44:11

Currency strength and forex market overview

44:11

The speaker discusses the unusual situation where the British pound is isolated at the top of the currency strength indicator on a 30-minute chart, highlighting its extended overbought condition. They explain how currencies typically revert from overbought to oversold states, noting the pound’s strong upward trend driven by increased volume and momentum. The price action moves quickly through low-volume regions, with volatility triggering either congestion or reversals. In this case, extended congestion occurred for several hours before renewed momentum pushed prices higher, supported by strong volume and price agreement.

46:10

Attention shifts to other currency pairs, which show no significant movement and remain clustered in a narrow, sideways range on the 30-minute timeframe. Unlike the pound, pairs like the US dollar against the Canadian dollar, Australian dollar, euro, and Swiss franc display weak trends and compact trading zones. Minor attempts at rallies or declines are noted, but overall momentum is lacking, suggesting a need for patience until stronger moves develop.

47:11

The analysis moves to currency futures on a faster five-minute timeframe, covering various pairs quoted against the US dollar, including the Australian dollar, British pound (cable), Canadian dollar, euro, yen, and New Zealand dollar. The volume price analysis (VPA) indicators and currency strength tools apply similarly to these futures. The speaker then briefly mentions shifting focus to commodities, noting that gold experienced a significant decline recently, referencing its daily chart, and indicates an intention to review oil as well.

48:15

Gold and oil market updates

48:15

The segment analyzes the February gold contract, highlighting a large volatility candle indicating potential congestion or reversal. Despite decent buying volume, the market sentiment appears bearish with a risk of price dropping to around 1770 intraday. A 15-second gold chart confirms a bearish trend with a strong downward move and some buying pressure at lower levels. On the three-minute chart, the price fluctuates around the volume point of control, facing significant resistance that prevents a breakout, reinforcing bearish momentum. Trend monitors on various timeframes, including five and ten minutes, continue to show bearish signals. The segment ends by briefly mentioning a steady rise in oil prices and introduces a transition to stock market analysis.

50:23

Stock trading strategies and Kellogg case study

50:23

The speaker discusses the natural bias of stock traders to expect markets to rise, highlighting that stocks do not always move upward despite this expectation. They focus on Kellogg’s stock as an example, explaining how it was setting up for a short trade due to a developing platform on the accumulation distribution indicator. This platform acts as a strong support and, once broken, becomes resistance, signaling potential weakness in the stock.

51:26

The analysis shows Kellogg’s stock struggling to rally and exhibiting weakness, confirming the short trade setup. The speaker explains traditional short selling through borrowing stock within a brokerage, which involves costs and dividend liabilities. They suggest options trading, especially buying puts, as a lower-risk and cost-effective alternative for trading downward market moves.

52:25

Options trading is recommended for beginners, with puts for bearish markets and calls for bullish ones. The speaker also touches on covered call writing, where one holds the underlying stock and sells options against it to reduce risk. They describe standard option contract sizes in the US and UK markets and introduce volume price analysis (VPA) charts of various time frames to assess stock movement and potential trade duration.

53:31

The speaker examines monthly chart levels using the camarilla indicator to estimate price targets for the trade. They note that Kellogg’s stock has breached key support levels and passed the S4 camarilla level, suggesting further downside potential with clear price movement and minimal resistance ahead.

54:29

Despite a general upward bias in stock markets, individual stocks like Kellogg’s can fall. The speaker emphasizes the importance of monitoring breakaway trading patterns and volume point of control in congested price areas to identify entry points. They highlight that traders should maintain a watchlist and focus on breakout levels to strategically open positions using various trading methods.

55:27

The speaker discusses maintaining a watchlist of stocks, using Caterpillar as an example of a long-term investment benefiting from capital expenditure cycles. They reaffirm that the same trading principles apply across different stocks and time frames, whether trading options, spread betting, or brokerage stock trades.

56:22

Focusing again on Kellogg’s stock, the speaker notes a consistent downtrend across multiple time frames, with the trend monitor showing increasing bearish momentum. They briefly reference the brand’s recognition and then shift to a quick overview of market indices and currency pairs, observing fragile rallies and mixed strength in the US dollar, Australian dollar, and Japanese yen.

57:21

The speaker addresses a viewer’s question about setting up trading screens like theirs, explaining that while there is no dedicated video tutorial, most of their setups use NinjaTrader 8. They note some limitations of the current video format but express a preference for this platform for conducting trading sessions.

57:55

Trading screen setup and platform insights

57:55

The speaker explains that the screen setup shown is optimized for webinars to display maximum information, including multiple charts and time and sales windows. They highlight a key feature of NinjaTrader 8, which allows multiple charts to be displayed and resized on a single screen. However, unlike some other platforms like TradeStation or TradingView, there isn’t an automatic arrangement feature to neatly fill the screen with multiple charts, requiring manual resizing that can be inconvenient.

59:22

The setup discussed is primarily for presentation, while actual trading involves multiple monitors with larger screen real estate. The speaker shifts focus to analyzing recent market conditions on a 15-second chart, noting the market is choppy and lacks clear trends. They advise patience on such days, waiting for key levels to be breached before entering trades, using volume, price confirmation, and other indicators like the VIX and the dollar for decision-making.

01:00:52

The speaker acknowledges that trading days vary, especially for index traders, and emphasizes the importance of finding a setup that suits individual preferences. They personally use the presented multi-time frame approach with six charts, which provides a comprehensive market view. However, they caution traders to be clear about their strategy and avoid confusion when using multiple time frames, warning against switching between scalping and trend positions without clear intent. The segment concludes with the speaker preparing to show additional platform features.

01:02:15

Quantum Trading indicators and education program

01:02:15

The speaker introduces various trading indicators available on platforms like QuantumTrading.com, MT4/5, Ninja Trader 7/8, TradingView, and TradeStation. They mention ongoing efforts to port all outstanding indicators to TradingView, including currency strength, currency matrix, currency heat map, volume point of control, and support resistance. Customers who purchase the TradingView package now will receive all these indicators for free. Additionally, TradeStation webinars focusing on stock-specific content will be rolled out soon. The speaker emphasizes that buying the full package grants access to all current and future indicators without extra cost.

01:03:12

The speaker describes the Complete Forex Trading Program, which offers an extensive and comprehensive education for forex traders, including around 450 lessons, 250-260 hours of video content, and 13 PDF downloads. The program also includes a full set of trading indicators, with credit given to those upgrading from individual indicator purchases. The program has been very successful since its launch two years ago and now includes a funded forex program. This funded program allows students to trade with accounts funded by the company, starting from $5,000 to $15,000 for evaluation, which can be scaled up to $2 million. The risk is borne by the company, not the student, but participation requires enrollment in the Complete Forex Trading Program. The session concludes with well wishes for the trading day.

01:05:15

Session wrap-up and future webinars

01:05:15

The speaker encourages patience regarding uncertain outcomes and thanks the audience for attending. They inform viewers that weekly emails will be sent with webinar links for registration. The session concludes with well wishes for safe and successful trading during challenging times and an invitation to join next week’s event.

By Anna Coulling – creator of volume price analysis