Volume
In this article will dive into the volume which is the fuel of the market without volume price wouldn’t move. Will explore how to use volume to our advantage in Price Action, Big institutions and conform trades.
Table of Contents
Volume
- Volumes are the most important information the market can give us.
- Why is it so important?
- It is because around 80 % of all trades and volumes are made by the big financial institutions (the big guys/smart money)
- They move and manipulate the markets.
- They have the best trading experts, technology, algorithms and also extreme amounts of money.
- Having so much money is also a problem though as we discussed in [[Price Action]].
- It is hard for them to move such amounts, to invest them and also to hide their trading intentions.
- Big institutions can’t just buy 50,00,000 shares of State bank of India with one-click.
- They need to enter their positions slowly, unnoticed. Still, they will never be able to hide.
- Their volumes will always be visible, and we will always be able to track them.
- How to Track volume?
- With Volume Profile (In Volume 5) &
- Volume (Bar volume/Volume at Time). Before learning Volume Profile lets start with volume.
Why is Volume important ?
- Volume applies to all markets and is equally valuable, whether there is market manipulation or not.
- Volume reveals buying and selling, when the market is running out of steam.
- It reveals whether buying interest is rising or falling on a daily basis.
- It reveals all the subtleties (features) of pull backs and reversals on tick charts and all time-frame charts from minutes to hours.
- Volume is the fuel that drives the market.
- Volume reveals when the major operators are moving in and out of the market.
- Without volume, nothing moves, and if it does move and the volume is not in agreement, then there is something wrong, and an alarm bells should ring!
Price and Volume
“Trading and investing is like any other pursuit — the longer you stay at it the more technique you acquire, and anybody who thinks he knows of a shortcut that will not involve ‘sweat of the brow’ is sadly mistaken”
– Richard Wyckoff
- Whilst this sentiment could be applied to almost any endeavor in life, it is particularly relevant in the study of price and volume.
- The basic laws of supply and demand with price, volume, time and trend at its heart, Wyckoff detailed three basic laws.
- The Law of Supply and Demand
- The Law of Cause and Effect
- The Law of Effort vs Result
Understanding Wyckoff 3 Rules
The Law of Supply and Demand
- When demand is greater than supply, then prices will rise to meet this demand, and
conversely when supply is greater then demand then prices will fall, with the over supply being absorbed as a result. - Consider the winter sales! Prices fall and the buyers come in to absorb over supply.
The Law of Cause and Effect
- In order to have an effect, you must first have a cause and the effect will be in direct proportion to the cause.
- In other words, a small amount of volume activity will only result in a small amount of price action.
- This law is applied to a number of price bars and will dictate the extent of any subsequent trend.
- If the cause is large, then the effect will be large as well.
- If the cause is small, then the effect will also be small.
- The simplest analogy here is of a wave at sea.
- A large wave hitting a vessel will see the ship roll violently, whereas a small wave would have little or no effect.
The Law of Effort vs Result
- The price action on the chart must reflect the volume action.
- The two should always be in harmony with one another, with the effort (which is the volume) seen as the result (which is the consequent price action).
- If they don’t then there is anomaly & we have to spot such anomalies to trade right.
That’s it for this article next will start with VPA i.e. Volume Price Analysis.