In this article we explore the importance of volume as an indicator in trading, applying it to a trend following strategy on the Nasdaq (NQ) futures, listed on the CME (Chicago Mercantile Exchange). Although breakouts accompanied by high volume are generally considered more reliable, we asked ourselves a question: what happens in the stages approaching the breakout of key levels?
Through a quantitative approach, we will analyze the impact of volumes on the strategy to evaluate if and how they can offer an operational advantage compared to the traditional approach.
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Volume indicator and price breakout
The volume indicator measures the quantity of shares or contracts traded in a certain time frame, providing an overview of the activity of market participants. This indicator can be used in several ways, including analyzing volume behavior in breakout phases.
A breakout occurs when the price breaks above a key level, such as the previous session’s high or low. The theory suggests that a breakout accompanied by above-average volume indicates a strong consensus among participants, increasing the likelihood that the move is sustainable. But what happens in the phases preceding the breaking of these levels? Could pre-breakout volumes really influence the effectiveness of the move?
Figure 1. In red, the volume indicator.
Nasdaq price trend analysis on a weekly basis
Before introducing the strategy, it is useful to analyze the average weekly trend of the Nasdaq future, which is characterized by a long-term bullish trend as it is an instrument that replicates the performance of a stock index. For this analysis, we will use the Bias Finder, a proprietary software from the Unger Academy that allows you to evaluate the average trend of time series over different time periods.
In this case, we will focus on the week to identify any bullish or bearish days. As shown in Figure 2, the bullish trend of the instrument clearly emerges, but above all we note that the last session of the week is the one that presents a weaker average performance compared to the other days.
With this information we can develop a strategy that exploits this peculiarity with a targeted approach, applying this condition to short positions. In other words, the latter will be opened exclusively on Fridays to exploit this historical weakness.
Figure 2. Average weekly price trend of the Nasdaq Future.
Breakout strategy on Nasdaq Future without volume conditions
As mentioned above, this is a trend following strategy, where you follow the price movement once it breaks through key levels. The basic idea is that, once these levels are exceeded, a continuation of the price in the same direction is expected.
For this strategy, the reference levels will be the high and low of the previous session, and the rules are as follows:
- Long positions: A long position will be opened when the high of the previous session is broken. The position will be closed if the price breaks the previous session’s low.
- Short positions: On the contrary, a short position will be opened if the price falls below the low of the previous session. The position will instead be closed if the price exceeds the high of the previous session.
A distinctive element of the strategy concerns the side shortoperating exclusively on Fridays, in line with the weekly trend analysis discussed previously. These trades will be closed by the end of the session, thus avoiding leaving exposure short open on weekends, when market gap risks may be higher.
To limit the opening of multiple trades in the same direction during a single session, an additional rule has been introduced: a new trade will only be opened at the first break of key levels. In other words, if a newly opened long trade is closed following the breaking of the previous session’s low and, subsequently, the price breaks the same session’s high again, another long trade will not be opened.
Finally, they were set one stop loss of $3,000 and a take profit of 6,000 dollars, with the aim of eliminating any outliersi.e. outliers that could distort the analysis of the results.
Performance of the basic strategy on Nasdaq Future
Let’s move on to the performance analysis and consider the data starting from 1 January 2010. As can be seen from the equity line shown in Figure 3, the strategy is highly performing, with an overall net profit of around 200,000 dollars and drawdown all in all contents.
Figure 3. Equity line of the breakout strategy on Nasdaq Future without volume conditions.
From the Total Trade Analysis, visible in Figure 4, over 1200 trades emerge, with a clear prevalence of operations on the long side. This result is consistent with the rules of the strategy, since short positions are opened only on Friday.
A significant figure is represented by the average trade, which stands at 153 dollars. This value is already sufficiently large to consider the strategy ready for live trading, taking into account any operational costs such as slippage and commissions. Particularly interesting is the average trade on the short side, which reaches $111. Despite the long-term bullish bias that characterizes the Nasdaq future, the strategy manages to effectively exploit declines as well.
Figure 4. Total Trade Analysis of the Nasdaq Future breakout strategy without volume conditions.
Application of the volume indicator to the breakout strategy on Nasdaq Future
To further validate breakouts, we introduce the use of the volume indicator within the strategy. Specifically, we will add the following operating condition: the current day’s volumes must be above the 10-period moving average, which represents approximately two stock market weeks. You will enter the position the next day only if this condition is met.
This filter allows you to analyze the market dynamics before the breakout, starting from the assumption that today’s volumes can provide an indication of the potential strength of a future movement, without necessarily being tied to the theory that associates high volumes with the breakout itself.
Finally, it should be underlined that this condition applies exclusively to entry into position, while exits remain unchanged compared to the original version of the strategy.
Analysis of results condition 1: entries only with volumes above average on the previous day
Analyzing the results of the strategy with the volume filter, a drastic deterioration in performance is observed. The equity line, visible in Figure 5, shows a loss of the original regularity, with much deeper drawdowns compared to the previous version. One in particular stands out in the period between 2018 and 2023.
Figure 5. Equity line of the breakout strategy on Nasdaq Future with above average volumes.
Net profit dropped dramatically, from $200,000 to just $75,000. From the Total Trade Analysis in Figure 6 we see that the total number of trades has decreased, which could partially explain the decline in net profit. However, the average trade also suffered a significant reduction, falling below $100 and thus making the strategy less attractive for live trading.
The most evident drop is recorded on the short side, where the average trade went from around $111 to a negative value of -70 dollars. This result indicates that the volume filter failed to improve the effectiveness of the strategy, but rather compromised its ability to exploit declines.
Figure 6. Total Trade Analysis of the breakout strategy on Nasdaq Future with above average volumes.
Faced with these poor results, we try to reverse the condition: we will operate only when volumes are lower than the moving average, to check whether this approach can lead to an improvement in performance.
Analysis of results condition 2: entries only with volumes lower than average on the previous day
By applying the opposite condition, i.e. operating only when volumes are lower than the moving average, there is a notable increase in performance. The equity line, visible in Figure 7, is much more regular, even better than that of the initial version of the strategy. The net profit reaches approximately $230,000, exceeding the results of the basic version.
The most significant improvement is observed in the Total Trade Analysis, shown in Figure 8. Although the number of trades is similar to the version with the original volume filter, the real leap in quality is seen in the average trade, which exceeds $300. This makes the strategy not only more robust, but also extremely attractive for live trading.
A surprising fact concerns the short side, where the average trade reaches a value of over 372 dollars. An impressive result considering the long-term bullish bias that characterizes the Nasdaq futures.
Figure 7. Equity line of the breakout strategy on Nasdaq Future with lower than average volumes.
Figure 8. Total Trade Analysis of the Nasdaq Future breakout strategy with below average volumes.
Final thoughts on using volume to improve the effectiveness of breakout strategies
This analysis offers an interesting perspective on the use of volume in trading. Instead of focusing on volumes during breakouts, we analyzed the impact of the previous day’s volumes on the strategy. The results show that trading after days with volumes below the moving average can significantly improve performance.
A possible explanation could lie in the dynamics of the market. High volumes, in fact, may reflect a phase of greater uncertainty and volatility, with the risk of false signals or rapid reversals. Conversely, days with lower volumes could indicate a more stable market, favoring more consistent and predictable movements, making breakouts potentially more reliable.
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Until next time,
Andrea Unger