Stock volume is the major indicator for the professional trader.
Self-regulated exchanges around the world would like to keep true volume away from the public. They do this because they know how important stock volume is in analysing markets. Volume is little understood as to its imporatance and significance by the genral public. This could be because of the limited teaching available on this vital part of technical analysis. If you don’t use volume on a chart it’s like buying a car without a petrol tank.
When traders are analysing charts they usually view stock volume in isolation, or averaged in some way across and extended timeframe. Analysing volume, or price for that matter, is something that cannot be broken down into simple mathematical formulae. This is one of the reasons why there are so many technical indicators. Some formulas work best for cyclic markets, and some formulas are better for volatile situations. Whilst others are better when prices are trending.
Technical Analysis combining Stock Volume and Price
Combining stock volume and price together does have its limitations as well, as there are times when the market will go up on high volume. It will also do the same thing on low volume, or move sideways or fall on the exact same volume.
Price and volume is intimately linked and that’s the reason why TradeGuider was created because the interrelationship between price and volume is very complex. The TradeGuider software is able to analyse the markets in real time and the display of the indicators, around 400 of them, show where there is an imbalance of supply and demand.
Don’t Believe The Media – Urban Myths You Should Ignore
The media is always misleading the retail trader and investor. Often they quote that “for evey buyer, there has to be a seller” and “all that is needed to make a market is two traders willing to trade at the correct price.”
Those statements sound logical and you might accept them at face value. The markets may seem straight forward, but that couldn’t be further from the truth. You may purchase stock and somebody is willing to sell to you. However, more often than not you are purchasing a small part of large blocks of sell orders that are on the market makers books. Those orders have been sitting there way before you decided toi buy. The sell orders are stock waiting to be distributed at certain price levels and not lower.
The market is supported up until these sell orders are exercised, when transacted may weaken the market, or turn it into a bear market.
Large blocks of stock are frequently traded amongst the professional traders. The volume on these transactions are very high to ultra high. Professional traders trade to make money, and whatever the reason is for these transactions, they are not there to benefit the retail trader or investor. Do not ignore these high volume areas, as this is the footprints left by the professional traders so that you can follow.
Understanding Stock Volume
Volume is the powerhouse of the stock market. It’s not difficult to understand once the basic principles of supply and demand are understood. When you start to understand stock volume, you will be trading on facts and not the news.
Have you ever heard the saying thst the market will go up when there is more buying (demand) than selling. Go down when there is more selling (supply) that buying may seem like an obvious statement. To understand this statement you must ask what has price done on this volume?
You must take into account the price spread, which is the difference between the highest and lowest trading points during the timeframe you are observing. The volume shows the activity of trading during that specific timeframe. You will need to compare the volume of the current bar with the previous bars formed on the chart. Then you can determine if the volume is relatively low, medium or high.
Compare Stock Volume With Price Spread
Comparing stock volume information with the price spread, you will know if the professional traders are bullish or bearish.
Now lets compare volume to the accelerator of a car. If you are approaching a hill (resistance) you will find the cars momenetum up the hill will be different of a flat surface. More power will need to applied to the accelerator inorder for the momentum to be maintained.
You may conclude that this movement uphill could not possibly be genuine lasting movement and that it’s probably caused by some reason other than the power application. It’s obvious that cars cannot travel up hill unless power is applied to the accelerator.
This scenario explains why markets can move higher on low volume. In any market, when the power is turned off, the movement is caused by momentum. All moves with differing types of stock volume activity can be explained using the “accelerator” analogy.
Before you go, view my analysis of the S&P 500