Wave Volume – Strategy, Rules, Settings, Returns

Sifting through the randomness of price movements to identify trading opportunities can be a daunting task, even for seasoned traders, but one tool that promises to help our understanding of price action is the wave volume indicator. What do you know about this indicator?

The wave volume indicator is the cumulative sum of transacted volume (including buys and sells) during a specific price wave/swing — a downswing or an upswing — in a chosen timeframe. It was developed by David H. Weis based on Wyckoff’s theory of price swings, market cycles, and volume changes during the accumulation and distribution phases of the market cycle. The indicator is plotted below the chart as a volume histogram.

In this post, we will take a look at most of the questions you may have about this indicator: what it is, how it works, and how you can improve your trading strategies with it. Let’s dive in!

• Also known as Wyckoff Wave Volume or Weis Wave Volume, the wave volume indicator is the cumulative sum of transacted volume (including buys and sells) during a specific price wave/swing — a downswing or an upswing — in a chosen timeframe.
• We show you a backtested trading strategy complete with trading rules and settings.
• More trading indicators if you click here.

What is Wave Volume in Trading?

Also known as Wyckoff Wave Volume or Weis Wave Volume, the wave volume indicator is the cumulative sum of transacted volume (including buys and sells) during a specific price wave/swing — a downswing or an upswing — in a chosen timeframe. It was developed by David H. Weis based on Wyckoff’s theory of price swings, market cycles, and volume changes during the accumulation and distribution phases of the market cycle.

The indicator is plotted below the chart as a volume histogram and shows how much trade is taking place during the price wave. It helps traders to analyze price waves and see the cumulative volume behind each price wave so they can assess the strength of the trend, spot the footprints of smart money during accumulation or distribution, and anticipate trend reversals when applicable.

Wave Volume trading strategy – rules, settings, and returns

A backtested strategy is coming shortly.

How Does Wave Volume differ from regular volume?

Wave volume differs from regular volume in that, unlike the regular volume which shows the volume transacted only within the period that constitutes a price bar, the wave volume shows the cumulative volume of the underlying asset transacted during a price wave or swing. In other words, the wave volume is the sum of all the regular volumes recorded for all the price bars that form the price swing under consideration.

While regular volumes may show volume spikes for individual price bars, the cumulative wave volume offers more information about the volume transacted during the entirety of the price swing. So, with wave volume, you can compare the volume changes during different price waves.

Why is Wave Volume Important for Traders?

The wave volume is important for traders because it makes it easy to compare volume changes during different price waves. This is particularly important during the accumulation or distribution phase of the price cycle, where it can help to show what the smart money is doing and when they are likely to move the price in their intended direction.

The indicator is very important for traders using the Wyckoff principles of price action analysis to assess the strength or weakness of the market. For instance, during accumulation, the final wave that breaks out of the range tends to have more volume than the other waves in the price range. Likewise, the downward wave that breaks below a distribution range does so on huge volume.

How is Wave Volume Calculated?

The wave volume is calculated as follows:

• Identify the current price swing/wave using probably the zigzag indicator.
• Record the regular volume of each price bar printed in the ongoing price swing.
• Cumulatively calculate the wave volume by summing up all the regular volumes for the price bars in that price swing up to the current price bar.
• For every new bar printed, add its regular volume to the last cumulative volume calculated.

What Tools Can Measure Wave Volume?

Tools that can measure the wave volume are usually indicators custom-made for that purpose, as most trading platforms do not have built-in tools for measuring wave volume. You can search online for custom indicators for wave volume for the trading platform you are using. If you can’t find it, you may pay a programmer to create one for you, or you manually track the wave volume using the regular volume of each price bar in the price swing.

Can Wave Volume Predict Market Trends?

Yes, the wave volume can predict market trends, but not directly. It can predict the strength behind market trends but not the price trend itself, as it is a volume-based and not a price-based indicator. Traders can use the wave volume to understand the strength behind a price move and possibly gauge if smart money is in the market — a huge wave volume could signify the presence of smart money in the market if the price move is to their advantage.

What Are the Benefits of Using Wave Volume?

The benefits of using wave volume include:

• The indicator makes it easy to compare volume changes during different price waves.
• It is very useful during the accumulation or distribution phase of the price cycle, where it can help to show what the smart money is doing.
• It is very useful for traders using the Wyckoff principles of price action analysis to assess the strength or weakness of the market.
• The indicator can be used to anticipate the end of a trend and the beginning of a new trend.

How to Identify Wave Volume Patterns?

To identify wave volume patterns, you have to study the price waves and the wave volumes over and over again in different contexts to begin to see if specific patterns emerge in the wave volume. One of the patterns you may notice is that in trending markets, the wave volume is bigger for the impulse wave in the direction of the trend than that of the pullback wave. Another pattern you may notice is that the last wave of the trend tends to have extraordinarily huge volume due to buying climax or selling climax (capitulation) as the case may be.

What is the Relationship Between Wave Volume and Price?

The relationship between wave volume and price is that the wave volume shows the strength behind a price move. In technical analysis, it is believed that the greater the volume behind a price move, the more likely the move is valid. This is particularly true if a price wave leads to a breakout — the wave volume has to be huge to validate the breakout, or else the breakout would be looked upon with suspicion. Also, a pullback is expected to happen on low wave volume. If it happens on a huge wave volume, traders may suspect a potential reversal.

Can Wave Volume Indicate Market Reversals?

Yes, the wave volume can indicate market reversals in certain circumstances. In a prolonged trend, the last impulse wave normally happens on a huge wave volume, indicating a buying climax in the case of an uptrend or a selling climax or capitulation in the case of a downtrend. Also, during the accumulation phase, the price wave that breaks above the accumulation range tends to happen on a huge wave volume, indicating that the trend has gradually reversed from a downtrend to an uptrend. The same is true for the distribution phase that reverses an uptrend to a downtrend.

How to Use Wave Volume in Trading Strategies?

To use the wave volume in trading strategies, you have to understand how the indicator works so you know how to effectively combine it with other indicators and price action analysis to formulate robust trading strategies with clear entry and exit criteria and risk management parameters.

For instance, you can combine it with a moving average and reversal candlestick patterns to trade the reversal of pullbacks. In this strategy, the moving average shows the trend direction, the wave volume confirms a true pullback with its lower volume, and the reversal candle pattern shows when the pullback is about to end for a new impulse wave to emerge in the trend direction.

What Are the Limitations of Wave Volume?

The limitations of the wave volume include:

• The indicator is based on volume data and, as such, cannot be used in markets, such as the spot forex market where the volume data is not available.
• Since it is not based on price data, it does not give direct price information, such as the direction of the price trend.
• It is based on historical volume data and may track price bars based on the lagging zigzag indicator, so it can lag behind the next price swing by some bars.
• It cannot be used as a standalone trading strategy.

How to Combine Wave Volume with Other Indicators?

To combine the wave volume with other indicators, you have to understand how it works so you know the indicators that can complement it. With the right indicators, you can get the best out of the wave volume. For instance, since moving averages can show the direction of the price trend, you can combine it with a moving average indicator to identify the trend and the volume strength behind it. Other indicators you can combine wave volume with are price momentum indicators.

What Are Common Mistakes with Wave Volume Analysis?

The common mistakes with the wave volume analysis include:

• Using the indicator alone to predict the direction of price movement — the indicator does not give direct price information and has no clue of the direction of the price.
• Not analyzing what the price is doing and only focusing on the wave volume sizes
• Not having a robust trading strategy with clear entry and exit criteria.
• Not having a risk management plan.
• Not considering market conditions before trading.

How Can Beginners Start Using Wave Volume?

Beginners can start using the wave volume indicator only when they have learned how it works and how to make use of it in their trading strategies. The key is to know how to combine it with price action and other indicators or analysis tools, such as candle patterns, to formulate reliable trading strategies. It is also important to backtest every trading strategy before committing money to it.

Is Wave Volume Effective for Day Trading?

Yes, the wave volume is effective for day trading. What matters is to use the right trading timeframe and a profitable trading strategy with positive expectancy. For day trading, you may have to trade on the 1-hour, 30-minute, or 15-minute timeframe. The 5-minute timeframe may be too small to get a good view of the market structure, while a 4-hour timeframe may be too big to snipe the average daily price swings.

Apart from the timeframe, you should also consider the strategy you are trading. To have an effective day trading, your trading strategy must be backtested and proven to have positive expectancy in the market you’re trading.

What Are the Best Platforms for Wave Volume Analysis?

The best platforms for wave volume analysis are the ones that have a built-in wave volume indicator and also provide you with reliable volume data for your wave volume analysis. But even platforms that don’t have a built-in wave volume indicator can be very useful if they support custom-made wave volume indicators and provide reliable data both for live analysis and historical data for backtesting. TradingView and Tradestation may be some of the best platforms for wave volume analysis.

How to Interpret Wave Volume Spikes?

To interpret wave volume spikes, you have to be sure that what you have is a good wave volume indicator because it is unusual for the indicator to produce volume spikes. Generally, the wave volume indicator is a cumulative indicator, and as such, does not usually have volume spikes. However, the wave volume of a price swing may be unusually larger than those of the swing before and after it, and that may be termed a wave volume spike. In this situation, it is important to study the price action to see what the price is telling you — it could be that there’s a breakout or a buying or selling climax.

Can Wave Volume Help in Detecting False Breakouts?

Yes, the wave volume indicator can help in detecting false breakouts, as it can show the trading volume of the price swing that caused the breakout. Generally, it is believed that a breakout should happen with a huge volume to show the strength of the price move and the intention of those behind the move. So, when a breakout occurs on a small volume, it is likely to fail, giving rise to a false breakout. Interestingly, if the wave volume of the return price wave is huge, that could be a confirmation of the false breakout and a trading opportunity in the opposite direction.

What Are Some Real-Life Examples of Wave Volume Usage?

These are some real-life examples of wave volume usage:

Example 1: NVIDIA chart: Uptrend:

In the NVIDIA chart below, you can see that the price was trending upward. Notice the pullback (a consolidation rectangle) that formed with a low wave volume. Later, the price wave that led to a breakout above the rectangle showed a much bigger wave volume.

Example 2: Tesla chart: Downtrend

In the Tesla chart below, you can see that the price is trending downward. Notice the price consolidation (a pullback) that formed on a low wave volume. Subsequently, the price broke lower on a higher wave volume and continued trending lower.

How Does Wave Volume Relate to Market Sentiment?

The wave volume does not directly relate to market sentiment, but it can offer some insights into the activities of the big players in the market —the smart money. It can tell you whether the smart money is accumulating positions after a downtrend or distributing their position at the peak of an uptrend. If you deeply study the wave volume during an accumulation or distribution phase, you may see the footprint of smart money to know where and when they intend to move the price.

Can Wave Volume Be Used for Long-Term Trading?

Yes, the wave volume be used for long-term trading if you analyze it on a timeframe that is suitable for long-term trading and use other supporting long-term indicators to identify good long-term trade setups. The right timeframe for long-term trading could be the weekly and daily timeframes. If you analyze the wave volume on such timeframes along with other supporting indicators, you can find long-term price setups. Remember to backtest any strategy — long-term or short-term — before using it with real money.

How to Backtest Wave Volume Strategies?

To backtest wave volume strategies, you can follow these steps:

1. Identify the markets you want to backtest the strategy
2. Source the data you need for the backtesting and divide them into in-sample and out-of-sample data.
3. Formulate the strategies you want to backtest and the parameters or settings you need to adjust for the various strategies.
4. Code the strategies into trading algorithms.
5. Run your backtesting on the in-sample data and optimize with the out-of-sample data, adjusting your parameters as needed.
6. Finally, evaluate the results of your backtesting.

What Are the Best Resources to Learn About Wave Volume?

The best resources to learn about wave volume include the work of the legendary stock trader Richard D. Wyckoff, where you can learn the Wyckoff market phases and price waves. An important one that specifically focuses on the wave volume is the book: Trades About to Happen, by David H. Weis. Other resources are developers’ explanations on TradingView and trading blogs like therobusttrader.com and quantifiedstrategies.com.

How to Avoid Overtrading with Wave Volume Analysis?

To avoid overtrading with wave volume analysis, you must have a clear trading strategy with clear entry and exit criteria. Then, you must have the discipline to stick to the strategy and trade only when the strategy identifies a trading setup. Also, you should have a trading plan that specifies when to trade — for instance, if you’re trading forex, your plan could be to trade only the London or New York session.

What Are Advanced Wave Volume Techniques for Experts?

Advanced wave volume techniques for experts include the use of trading algorithms and applying portfolio management techniques. Experts who prefer automated trading can convert their wave volume strategies to trading algorithms that trade for them as they want. Others can use wave volume analysis to manage their portfolios or rotate from one sector or asset to another based on the opportunities signaled by their wave volume strategies.