Volume The Key to the Truth
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 Ignore
There 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.
Master the Markets 17
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?
