Volume Based Technical Analysis
Analysis of Volume Surges
Volume surges are one of the most important aspects of volume-based technical analysis. The Money Flow helps to define the current mood and possible changes in a trend. Volume accumulation helps to predict overbought and oversold stages and how strong a reversal movement might be. A volume surge is a unique tool that reveals the underground games of big institutional traders.
Big volume means big money and big institutional traders.
Bear in mind that volume always has two-sides in transactions. For each buyer there is a seller. If volume equal one, it means that one trader sold one share to another trader. Thus, we have one buyer and one seller. Do not get caught in the "media terminology" that big volume during a crash means that investors are selling in huge volumes. Volume is the number of shares transferred from one person's hands to those of another. The number of sold shares is always equal to the number of bought shares. A price goes down because there more sellers than buyers and sellers are ready to lower their bid (ready to sell at cheaper price). Big volume during a crash means that big institutional traders who are attracted by the low bargain price have started to buy from those who were pushing the price down in panic.
We can call them "Big Money", "Smart Money", Institutional traders, professional traders and etc. In various sources you will find that the analysts call these traders by different names. It does not matter how we call them, the reality is that these investors trade in big volumes and when they start to act the volumes of their trades either create increase in demand or increase in supply. The money of these traders move the price.
Coming back to a volume surge you run when price has been in a strong decline. Yes price goes down because of panic selling. Yes, the decline means that Supply overwhelms the Demand and the sellers are panic and they are ready to sell at cheaper price. That is all correct and below you may see the mechanics behind a decline
Figure #1: Example of Supply/Demand balance during a down-trend
However, when we see an increase in volume (volume surge) during price decline, it means that the Bullish traders are coming back, they create increase in demand and and they weaken bearish pressure by buying from the sellers in panic. That is why we see strong increases in volume at the bottom of down-trends. When you compare the Figure #2 below to the Figure #1 above, you will understand that increase in volume during down-trend is actually a bullish signal which mean increase in Demand, which means that we may see a shift in the supply-demand balance when the Bulls defeat the Bears.
Figure #2: Continuation of the figure #1 - increase in volume caused by increase in Bullish activity.
You may go trough deeper explanation of mechanics behind a volume surge HERE
As a rule, the games of big institutional traders lead to a shift in the supply/demand balance with further change in the sentiment and trend direction. If, before a volume surge, the number of sellers was large and they pushed the price down, then after the big volume surge this number will be smaller because institutional trader bought from a majority of sellers and there could be not many traders to push the price down. Instead, the number of buyers could become greater and they may begin to push the price up.
A big volume surge during a price advance means that institutional traders who are attracted to the high price decided to secure their profit by selling in huge volumes to greedy buyers. Again, as a rule, this leads to a shift in the supply/demand balance when those who wanted to buy have already bought, but those who wanted to sell are still selling by starting to push the price down.
As you see, volume surges reveal the actions of big players. If you believe that the price is driven by the sentiment of the big institutional traders then the analysis of volume surges is the only tool that can help you to discern their actions.
There is only one GOLDEN RULE that must be remembered in analyzing volume surges:
"In the majority of cases, a big volume surge leads to a shift in the supply/demand balance and, as a result, to a change in the sentiment and price trend."
No matter what timeframe you analyze and trade, volume spikes and surges reverse the trend. The only difference is that, on a lower timeframe, a price reversal reaction could be short-lived and, on longer timeframes, a price reversal reaction could be stronger.
There are several technical indicators that are used to analyze volume surges and volume spikes: Volume Oscillator (VO), Percentage Volume Oscillator (PVO) and Market Volume Oscillator (MVO), etc. MVO is considered to be one of the best in technical analysis in revealing bearish (during a price decline) and bullish (during a price advance) volume surges. Below is a NASDAQ 100 chart that clearly reveals the relationship between price reversals and volume surges.
Chart #1: NASDAQ 100 Chart with bullish and bearish volume surges defined by MVO
and corresponding reversal price reaction to those surges.
NEXT: Smart Money
By V. K. for MarketVolume.com
Our pages are constantly scanned. If we see that any of our content is published on other website, our first action will be to report this site to Google and Yahoo as a spam website.