Volume Based Technical Analysis
Why Volume Analysis?
Why is volume a trader's best friend?
Below are a few reasons why volume-based technical analysis is considered to be one of the most important aspects of trading and why professional and institutional traders always pay attention to volume in their analysis.
- Volume offers a complete picture of the market. You must remember that there is no price movement without volume. If the volume is equal to zero (no trades occurred) a security's price remain unchanged at the close price of the previous transaction (when volume was not equal to zero). The price movement is always accompanied by volume and single price analysis delivers only half of the picture. Only an analysis of volume and price together can provide a complete and accurate picture of a trend.
- Volume can help to determine the health of an existing trend. Price analysis helps to determine the current trend. However, by itself, it does not help you to determine how strong the trend is. When it comes to evaluating the health of a trend, only volume and advance/decline (breadth) indicators can help you to spot periods when the trend is strong or weak and might change its direction.
- Specialty volume of indexes and volume-based technical analysis are very good indicators for predicting index shifts. Volume of the indexes and exchanges is considered to be one of the best sources for analysis and predicting trend reversals. Averaged by the sum of volumes of all listed stocks, an index volume is less volatile than the volume of a single stock. Furthermore, it is more accurate in analysis and prediction.
- Volume is an indication of supply and demand. The technical analysis of volume is a basic, yet very important, element of market timing strategy. Volume is defined as the number of units traded during a specified time period. If a price trend tells you what is stronger in the market (supply or demand) at the present moment, only volume can tell you how strong the supply or demand is (how strong panic selling or greedy buying is). Only volume can signal a weakening in supply or demand and possible changes in the supply/demand balance and market sentiment, thus revealing possible trend turnovers.
- Volume-based technical analysis shows the reversal points of the market, and therefore when to buy and sell! Currently, when a change in sentiment and trend occurs in the market, most traders (investors) don't learn about it until it is too late. This usually happens due to the lag in the majority of technical indicators. Lagging indicators follow the trend and when a lag gets to be big for conservative trading it could be costly to an investor. In contrast, leading indicators, including indicators that are based on volume, predict possible changes in the trend. Trading volume, as one of the few leading technical indicators, offers investors an invaluable tool to know when and where a change in market sentiment will occur and act accordingly.
- Volume tracks the actions of Big Institutional Traders. One of the most important aspects of volume analysis is the analysis of volume surges. Volume during a price decline helps you to see where a stock is being repeatedly bought as it dips in large amounts (large number of transactions) by institutional traders. Similarly, towards the end of a rally, a wide volume surge often signals that the institutional traders are dumping their stocks because the move is at an end. If you weren't aware of it before, you should be starting to see why volume is a trader's best friend.
Additionally, unlike many indicators, volume is applicable to every timeframe. How can this be? Simple. Volume is a measure of mood/sentiment. Fortunately for us, human nature is the one ever-present constant of the stock market. Never forget that. Once you have your own emotions under control as a trader, the knowledge of this profound fact will guide you ever after as reliably as the North Star guides a lone sailor across the vast ocean.
For the first time anywhere, MarketVolume® offers a complete picture of the market. Not only do we supply you with up-to-the-minute index prices of a variety of major market indicators, we also show you the minute-by-minute trading volumes. It is this volume that shows the reversal points of the market and, therefore, when to buy and sell!