Emini S&P 500, Russell 2000, DOW and Nasdaq 100 Futures Charts.

Significant volume surges indicate that a large number of contracts are changing hands. As a rule, such volume surges reflect a change in market sentiment and frequently lead to at least a short-term price reversal.

Our SBV (Selling-Buying Volume) indicator helps you define critical levels at which a trend reversal is most likely to occur. Over a specified period, the SBV indicator calculates the difference between the volume production during a price (index) advance (“selling volume”) and the volume that is generated as the price (index) moves lower (“buying volume”). In order to make this indicator more precise and easier to use, we apply it to our modulated combined futures volume charts. Modulated volume allows us to analyze and compare the SBV indicator throughout the entire session by highlighting those volume surges that are not part of the typical diurnal variations, as they occur during the trading day. The use of combined futures volume also helps to smooth out volume surges during trading periods close to expiration.

The SBV indicator reflects the magnitude and duration of buying surges (which occur as the price / index moves down) and of selling surges (which occur as the price / index moves up). For instance, when the SBV indicator hits levels exceeding plus 66%, it reveals that selling volume has exceeded buying volume by more than 66% (the SBV indicator will be red). The opposite is true when the SBV indicator drops below a level of minus 66% (in this case, the SBV indicator will be green). In this particular example, buying volume would exceed selling volume by more than 66%. History shows that the levels used in the example above tend to serve as good trade entry and exit points; however, the best results to open a short trade are achieved when the SBV indicator rallied above plus 66% and then started to decline below that level. Similarly the buy point could be when SBV indicator dropped below minus 66% and then started to rally above that level. Keep in mind that this is a subjective threshold; traders may wish to adjust this number according to their own trading styles and risk tolerance.

A simple trading system can be created using the SBV indicator; however, keep in mind that futures trading remains risky. In advance of taking any trades with any trading system, we strongly urge futures traders to define stop loss and profit target levels – always in accordance with their personal risk tolerance.

Example of a simple SBV trading system for long positions:

Important: The 66% level for the SBV indicator was determined in relation to the prevailing market conditions at the time the examples above were selected. In order to establish the optimal critical levels for the SBV indicator, a trader should consider the current market situation and review a chart history of prior volume surges including their magnitude (i.e., the level the SBV indicator reached). Furthermore, it is important to look at more than one chart and to use multiple timeframes. For instance, while a volume surge may look imposing and appear to be critical on a 2-hour or a 1-day chart, the very same surge may not look nearly as significant on a 5-day chart. A prominent surge appearing on a 1-day chart could well affect index levels and bring about a one to five point reversal. In contrast, a prominent volume surge on a 5-day chart may prompt a reversal of 5 to 10 points.

1. Once the SBV indicator has dropped below minus 66% (the SBV indicator will show green), wait for it to rally above that level, then enter a long position;
2. Take profits once the price / index has risen to your pre-determined profit target level OR when the SBV indicator exceeds plus 66% (the SBV indicator will show red), whichever occurs first;
3. Take losses if the price / index declines below your pre-defined stop loss level.

In the example below, you can see how this trading system is used to go long the NASDAQ 100 E-mini. In this particular instance, a 5-point gain was pre-determined as a satisfactory profit target; a decline of 5 points was set as the stop-loss level.

Chart 1: Establishing a long position based on the SBV indicator. NASDAQ 100 E-mini.

Example of a simple SBV trading system for short positions:

1. Once the SBV indicator has advanced above plus 66% (the SBV indicator will show red), wait for it to decline below that level, then enter a short position;

2. Take profits once the price / index has declined to your pre-determined profit target level OR when the SBV indicator drops below minus 66% (the SBV indicator will show green), whichever occurs first;
3. Take losses if the price / index rises above your pre-defined stop loss level.

In the example below, you can see how the trading system is used to go short the S&P 500 e-mini. In this example, a 2-point decline was pre-determined as a satisfactory profit target; an advance of 2 points was set as the stop-loss level.

Chart 2: Establishing a short position based on the SBV indicator. S&P 500 E-mini.

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