Volume is the major indicator for the professional trader.You have to ask yourself why the members of the self-regulated Exchanges around the world like to keep
true volume information away from you as far as possible. The reason is because they know how important
it is in analysing a market!
The significance and importance of volume appears little understood by most non-professional traders. Perhaps this is because there is very little information and limited teaching available on this vital part of
technical analysis. To use a chart without volume data is similar to buying an automobile without a gasoline tank.Where volume is dealt with in other forms of technical analysis, it is often viewed in isolation, or averaged in some way across an 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, some formulas are better for volatile situations, whilst others are better when prices are trending. Some technical indicators attempt to combine volume and price movements together. This is a better way,but rest assured that this approach has its limitations too, because at times the market will go up on high volume, but can do exactly the same thing on low volume. Prices can suddenly go sideways, or even fall off, on exactly the same volume! So, there are obviously other factors at work. Price and volume are intimately linked, and the interrelationship is a complex one, which is the reason
TradeGuider was developed in the first place. The system is capable of analysing the markets in real-time
(or at the end of the day), and displaying any one of 400 indicators on the screen to show imbalances of
supply and demand.
Urban Myths You Should IgnoreThere are frequent quotes on supply and demand seen in magazines and newspapers, many of which are
unintentionally misleading. Two common ones run along these lines.
• "For every buyer there has to be a seller"
• "All that is needed to make a market is two traders willing to trade at the correct price"
These statements sound so logical and straightforward that you might read them and accept them immediately at face value, without ever thinking about the logical implications! You are left with the impression that the market is a very straightforward affair, like a genuine open auction at Sotheby's perhaps.
However, these are in fact very misleading statements.
Yes, you may be buying today and somebody may be willing to sell to you. However, you might be buying
only a small part of large blocks of sell orders that may have been on the market-makers' books, sitting
there, well before you arrived on the scene. These sell orders are stock waiting to be distributed at certain
price levels and not lower.
The market will be supported until these sell orders are exercised, which once sold will weaken the market,
or even turn it into a bear market.
So, at important points in the market the truth may be that for every share you buy, there may be ten thousand shares to sell at or near the current price level, waiting to be distributed. The market does not work like a balanced weighing scale, where adding a little to one scale tips the other side up and taking some away lets the other side fall. It is not nearly so simple and straightforward.
You frequently hear of large blocks of stock being traded between professionals, bypassing what appears to
be the usual routes. My broker, who is supposedly "in the know", once told me to ignore the very high volume seen in the market that day, because most of the volume was only market-makers trading amongst
themselves. These professionals trade to make money and while there may be many reasons for these
transactions, whatever is going on, you can be assured one thing: It is not designed for your benefit. You
should certainly never ignore any abnormal volume in the market.
In fact, you should also watch closely for volume surges in other markets that are related to that which you are trading. For example, there may be sudden high volume in the options market, or the futures market.
Volume is activity! You have to ask yourself, why is the ‘smart money’ active right now?
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Author: Tom Williams,
Master the Markets
Taking a Professional Approach to Trading & Investing by
Using Volume Spread Analysis
Published by TradeGuider Systems