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I think you have to be crazy to make buy/sell decisions on volume alone.
First of all, you can do fine with just price. If you do technicals on
currencies, you do not have volume (I dont think the futures help any).
But, I use volume simply as a warning. If volume is low on a move, then
I will be more likely to believe a singal that tells me the move is
over, but I still wait for the signal. In my mind, it should be used for
confirmation of a trend, and that's all.
Open interest probably to a degree is more useful. The problem is that
outside of the U.S., some of the exchanges, I am told, do not report it
properly. You also have to be careful of the underlying trend in o.i.
Recently, the much heralded liquidity problems in the bond market, were
probably partially behind the sharp drop in o.i. in bonds. If you used
o.i. to get out of bonds cause o.i. was falling, you missed one of the
greatest rallies in bonds ever. Also, I have found at the end of long
runs, while you get the divergence with o.i. falling as the trend
completes, it does not necessarily rise as prices reverse as everybody
closes positions for a bit until they figure a new trend has started.
Divergences are another fun and exciting thing. I do not know how many
times I have people tell me that there is a divergence in some
indicator, so they are reversing their position. This is very dangerous,
unless you have a reliable system that tells you to do so anyway. One
place that I hear it is when RSI or momentum do not confirm a move. If
these indicators do not make a new high, but are moving sharply up, I
cannot imagine why anybody would get out. You are marked to market on
price, not momentum. It is a warning that must be watched, but how many
momentum divergences have ultimately been erased (at which point you
throw in the towel, jump in, and that turns out to be the signal to
reverse).
Steve Poser
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