- [Narrator] Hey guys, it's Jonathon.
So, some people won't like this video,
but if that's the case,
please, in the comments,
tell me where I'm wrong,
because so many people
will trade off volume.
And so, I want to make
just a myth buster video.
You're not getting the complete story
when you trade off volume.
I know a lot of gurus out
there are pitching indicators
that use volume for trade ideas. `
Directly from Barrons,
off-exchange stock volume
usually exceeds 35%
and sometimes 40% of overall volume.
So, what that means is the
volume that we're seeing,
the volume that you're seeing,
you're only seeing 65% of it.
60% of it.
Where's the rest of the volume going?
Dark pools.
Block trades.
I made this slide to
explain the difference
between stock and options volume.
Now, options volume,
it's 100% transparent.
Stock volume, on the other hand,
high frequency trading,
block trades, dark pools.
Dark pools are...
Think of it as ways for institutions
to trade with one another
without going through the normal,
traditional exchange route.
Block trades, they can
do these massive, massive
block trades and report them
15 minutes after the trade.
So, we don't see those real time.
And then, obviously, high frequency,
they can just be churning,
which is actively trading
for, like, a tenth of a penny.
Be really careful
trading off stock volume.
And I know some people are doing it,
maybe you're having some success,
and this might bother you,
but, please, tell me in the comments
why you won't agree with this
and tell me that you're
going to be stubborn
and stick with still using volume,
even though you're not
getting the full story.
Now, options volume on the other hand.
Options volume is pure, no games.
There's no dark pools,
there's no reporting delays.
There's no block trades.
Well, there are block trades,
but they're reported right away.
It's 100% transparent.
The options market also has what's called
the NBBO, the National Best Bid and Offer.
And what that says is,
there's 12 different options exchanges.
On any given option, if
the best bid is 30 cents,
if somebody's 35-cent
bid in that same example,
30 cents can't trade.
Thirty cents cannot legally trade
until those 35 cents trade.
Now, for a stock, if
the last trade is $100
and I'm a $100 bid to buy 500 shares,
a million shares can legally trade at 99.
Which is insane.
How could they trade at
99 when I'm a $100 bid?
Well, because that's
how stock volume works.
There's not that National
Best Bid and Offer
like there is in the options market, okay?
Futures guys.
Futures are going to be the same thing.
Don't trust futures volume.
I like to trade spreads.
I like to trade relative value.
I was the director of
trading for a fixed-income,
a bond futures trading shop.
At that shop, over the course of the day,
the firm might buy 50,000
10-year bond futures,
10-year contracts, ZN.
That doesn't mean it's bullish for ZN.
We might be doing spreads
against the five-year,
spreads against the bond,
spreads against the cash,
spreads against off-the-run.
Futures volume is just as misleading.
Most of the futures volume
comes from people hedging their portfolio.
It's not going to give you
much information on direction.
So, be careful.
Be careful making trading
decisions purely on volume.
Now, with that being
said, if you're proficient
at trading unusual options
activity, good for you.
I find that's the most
valuable indicator there is.
Follow unusual options activity.
Get comfortable with it.
But, just trading off stock volume,
just trading off volume
in the futures market,
more harm than good guys.
I really don't think it's
going to benefit you, okay?
That's my take.
I'd love to hear your comments down below.
Thanks a lot.
Jonathon, Active Day Trader.
