Is Vol. Really Important ?

[gnome]

Quote from oddiduro:

Which is more likely to signal a reversal, a low volume hammer, or a high volume hammer? Both are white hammers, and both are reversing off clearly defined support.

Classic example of "considering volume will cost you more in lost profits than in saved losses".

If you're a "volume confirmation believer", don't play it and it turns out you should have, you've missed profit opportunity. Let stops control your misses.

The length of this thread alone is testamony to the passion traders feel about volume [and TA in general].... almost religious zeal. Passion has no place in trading. Observation and logical deduction are premier.

AS FOR VOLUME IN GENERAL... FORGET EVERY CONSIDERATION YOU EVER HAD AND EVERY CLICHE' YOU EVER HEARD ... and you'll make more money.

 

[Lamont_C]

Babak,

In all fairness to Wyckoff and the Law of Supply and Demand, you're misinterpreting both. The Law of Supply and Demand does not address equivalence per se; it addresses supply and demand.

Of course in order for a transaction to take place, there must be a buyer and a seller reaching some sort of agreement as to the terms, in this case price. However, it is demand and supply that will determine what the price will be. If you've ever been to an auction (and the stock market is an auction market), or even to a grocery store, you'll see the truth of this. It is the fact of this that enables price to, for example, rise on low volume, i.e., there is sufficient demand to push price higher, but only enough sellers to supply the stock that buyers require. If sellers were more eager to sell and there was insufficient demand to absorb the "supply", then trading activity ("volume") would increase, though one need not necessarily plot "volume" in order to see this. None of this means that price would necessarily change. To the contrary, there can be substantial trading activity with little or no price change at all. And it's entirely possible that both buyers and sellers will be satisfied after all this activity and that price will remain virtually unchanged. However, it is also possible that extreme selling or buying pressure will prevail and price will react, sometimes violently.

Therefore, there has to be somebody somewhere interested in buying something and somebody somewhere interested in selling it to them in order for a transaction to occur (there are, of course, other conditions, such as being aware of each other), but this has little to do with the Law of Supply and Demand. A better example of the Law would be a seller faced with a crowd of eager buyers, each outbidding the others in order to acquire whatever it is the seller wants to sell. All that demand pushes price higher, but there is ultimately only one transaction.

 

[MacroEvent]

Quote from Grob109:

OT

The sequence on futures indexes and cash regarding "smart money" is as you say. Smart money is trading the YM and DJ.

Price only: YM>>DJ>>DJ cash>> ES

Volume/price: YM 2min volume>>>>YM 2 min price ...snip ....... >>>>>ES 5 min volume*>>>>>ES 5 min price.

*pro rata.

oh and i forgot to mention listening to or watching the big s&p pit volume is very useful while manually trading the es.


pit audio links ----

http://www.realtimefutures.com/

http://www.tradethenews.com/

very helpful to see who and how big are the buyers and sellers in the big pit at all times.

 

[Babak]

Lamont,

I think you misinterpret what I wrote as well as what the concept of supply and demand is. Supply and demand is all about equivalence! That's the whole point of the idea. They meet at a specific level, at a point in time.

For volume to be produced, supply always equals demand in markets. Period. Price takes care of where they equal. But equal they do. Always. Christ, I sound like Yoda now.

Quote from Lamont_C:

... It is the fact of this that enables price to, for example, rise on low volume, i.e., there is sufficient demand to push price higher, but only enough sellers to supply the stock that buyers require.

For volume to be produced (transactions) there must be an equal amount of sellers and buyers. So I don't know how you can say 'only enough sellers...' and consider this anything but normal. They are always 'only enough sellers' and 'only enough buyers' at any price point and/or point in time. That is the essential order of markets.

Price rises not due to any imbalance between supply and demand. I've said this repeatedly. Such a notion is incorrect. Rather price rises due to the valuation put on the security by both buyers and sellers.

Quote from Lamont_C:

...If sellers were more eager to sell and there was insufficient demand to absorb the "supply", then trading activity ("volume") would increase,

If there was insufficient demand for the stock at the price the sellers were selling we would find bid/ask and no volume produced. Only when there is an equal buyer/demand to seller/supply would we see transactions print and volume produced.

Quote from Lamont_C:

... A better example of the Law would be a seller faced with a crowd of eager buyers, each outbidding the others in order to acquire whatever it is the seller wants to sell. All that demand pushes price higher, but there is ultimately only one transaction.

I disagree. It isn't 'all that demand' pushing prices higher. It is the fact that both the buyers and sellers have reevaluated their net present value of the security in question and have come to an agreement on price (at a higher level) and a disagreement on value (at a higher level). Until the seller agrees to sell at this higher price (whatever or however higher it is) we can not say that price has risen.

And once the seller(s) do(es) sell, then again, the market is in equilibrium - that is demand equals supply. So again, demand isn't pushing the price higher and neither is supply pulling the price higher. They are always in equilibrium. It is simply that, due to the recalculation, if you will, of both parties, the net present value of the security is higher. And therefore, demand and supply meet as usual - but at a higher price point than before.

Hope the above is clear. If not, let me know.

 

[LordMelbury]

Blimey this is a hard thread to follow,i wizzed through the last 90% of it out of curiosity to see how complicated it could get and have gained zero.

I make money consistently and have been doing for well over two years keeping things nice and simple.

pip pip

 

[Babak]

I was just thinking about why so many people have difficulty in grasping the concepts (supply/demand, price, transaction, etc.) that I'm trying to explain.

Then a thought occurred to me. It may be because they extrapolate from their regular normal lives into the stock market. Let me explain.

As Lamont put it, we tend to think in terms of auctions or grocery stores (fancy word: heuristics). But they are completely inappropriate as models of the stock market. Why?

Well, think about it. You walk into the grocery store and head for the watemelon section. You notice that their box is empty. You ask a helpful clerk and are informed that due to the summer heat, they sold out. Before trundling off, he shrugs, saying, a lot of demand, not enough supply!

That may explain watermelons (and why you don't have one) but it doesn't explain the stock market.

Why?

Because in the stock market, every second of every minute price is adjusted by the market forces. Demand meets supply continuously and seemlessly. If there was a sudden rush to buy the new watermelon ETF, then there must be an equal rush to sell the watermelon ETF. Otherwise not a lot of trades take place!

Lets say there was a shortage of watermelons (crop failure) . . . then those that really, really wanted to eat some juicy and delicious watermelons would bid up the price and get sold watermelons by the sellers at higher prices. The market would force the price so high that only those that really, really, really wanted to eat watermelons would buy. The sellers would only sell at high prices because that's what the market forces are dictating.

But this would never happen in the stock market because we don't have crop failures in stocks.

Sorry Fred, got no IBM t'sell ya. No rain this spring.

What I mean is that we don't 'create' IBM shares the way that watermelons are created. They aren't perishable the way consumer goods are. And the supply of IBM shares is not finite like watermelons - if you doubt this, look at Baidu's first day of trading ... how many times did its 'float' turnover? Did anyone at any point in time say, woah! wait a minute! we've run out of Baidu stock...sorry folks! got no more to sell ya.

I for one, am glad that our daily lives don't work like the stock market. And they shouldn't really. Can you imagine?

You go into the grocery store and the price of bread or milk is girating around, dancing up and down every second. You head for the check out and it zooms up, you pause and wait, it goes down, you zip to the check out and buy ....and as it passes the barcode reader you notice that it just spiked higher. Dang!!

So maybe, maybe...that's why there is so much faulty thinking when it comes to supply/demand and all that jazz. Supply and demand in the financial markets are one thing, and in the grocery store, they are another.

 

[lilduckling]

Quote from illiquid:

This seems like a very dangerous play for individual stocks, even for mega-caps like IBM (see April). I'd think you'd need to go for alot more than just a few points rebound to make up for the few times whatever news is coming out has not yet been fully priced by the time you are in.

Setups like these are very susceptible to optical fallacy of cycling through chart histories and saying "I would have bought there (last down day with huge volume)" when often times the days prior to the final drop will visually qualify as a buy signal in terms of price and volume when that actual last day is taken out of the chart.

no no no..... i just simplified it, there is more to it than that, also certain criteria and conditions have to be met. These set ups are far and between....but once in a while i do see one that warrents taking it.

 

[Babak]

Other than to point out for the umpteenth time that there can not be an imbalance between buyers/sellers...what you describe sounds to me like the GNP play brought to our attention by praetorian several years ago.

Where is he btw?

Quote from lilduckling:

One of my fav psychological plays is to go long on a stock that has fallen a great amount in a few days...each day worse than the prior with increasing volume. I go long if the last down day is huge with several times the ave volume. Now....this stock will move up easily with very little volume....simply because there is an imbalance in buyers/sellers....in other words it wont take much to move the stock up (path of least resistance). These plays have made me good $$$ in the past. 1 or 2 pt moves with little volume. On most other plays...i do not wait for volume to confirm....if you wait,......... well you know.

 

[Lamont_C]

Quote from Babak:

Lamont,

I think you misinterpret what I wrote as well as what the concept of supply and demand is. Supply and demand is all about equivalence! That's the whole point of the idea. They meet at a specific level, at a point in time.

For volume to be produced, supply always equals demand in markets. Period. Price takes care of where they equal. But equal they do. Always. Christ, I sound like Yoda now.




For volume to be produced (transactions) there must be an equal amount of sellers and buyers. So I don't know how you can say 'only enough sellers...' and consider this anything but normal. They are always 'only enough sellers' and 'only enough buyers' at any price point and/or point in time. That is the essential order of markets.

Price rises not due to any imbalance between supply and demand. I've said this repeatedly. Such a notion is incorrect. Rather price rises due to the valuation put on the security by both buyers and sellers.






If there was insufficient demand for the stock at the price the sellers were selling we would find bid/ask and no volume produced. Only when there is an equal buyer/demand to seller/supply would we see transactions print and volume produced.



I disagree. It isn't 'all that demand' pushing prices higher. It is the fact that both the buyers and sellers have reevaluated their net present value of the security in question and have come to an agreement on price (at a higher level) and a disagreement on value (at a higher level). Until the seller agrees to sell at this higher price (whatever or however higher it is) we can not say that price has risen.

And once the seller(s) do(es) sell, then again, the market is in equilibrium - that is demand equals supply. So again, demand isn't pushing the price higher and neither is supply pulling the price higher. They are always in equilibrium. It is simply that, due to the recalculation, if you will, of both parties, the net present value of the security is higher. And therefore, demand and supply meet as usual - but at a higher price point than before.

Hope the above is clear. If not, let me know.

It's clear, but, I disagree. The Law is about the movement of price to satisfy one or the other. If you disagree, attend a fine arts auction some time. There may be only one painting, and one seller. But the price is likely to be quite different if there is only one buyer, and possibly a reluctant one at that, than if there are dozens. The end result is one sale, but the dynamics of supply and demand will determine the price.

Perhaps you're confusing "supply and demand" with the Law of Supply and Demand, which is what Wyckoff is referring to. If not, then perhaps someone else can explain the Law better than I.

"that's why there is so much faulty thinking when it comes to supply/demand and all that jazz. Supply and demand in the financial markets are one thing, and in the grocery store, they are another. "

A final note: the faulty thinking may be a result of believing that they are different, where they are exactly the same.

 

[Spydertrader]

Clearly, many examples exist ( I mentioned HANS earlier and Babak has provided a few others) where it appears volume plays little or no role with respect to price changes. However, why focus on equities where the theory appears to fail? Instead, one should seek equities which define the rule. One can find many stocks which do correlate extremely well to the Price / Volume relationship. I have found that a search for such equities requires the use of 'high quality stocks' as defined by a high EPS and RS rank. Stocktables.com (and IBD and a few other web sites) provides a percentile rank for each equity making the sort for equities within the 90th percentile of EPS and RS relatively easy. Other considerations also apply (such as clearly defined float and average daily volume parameters) which further narrow down the universe of stocks to monitor.

The next step in the process of locating equities which follow the Price - Volume relationship involves searching for equities which cycle through a natural process over time. I use a minimum of five cycles in a six month time frame. Each cycle sees a price increase of 20% or more occurring over a period of six to eight days. Whether using clearstation.com to 'bulk the charts' and eyeball the price changes over time, employing David Marshall's Excel assessment sheet, or using the automation provided by The Hershey ChartScripts available at Wealth-Lab.com, one further culls the initial Universe of equities down to a level of focus which contains High Quality Stocks meeting a certain standard of excellence.

I have attached one example below in an effort to show how the change from Dry Up Volume to first rising volume provides an advance notice of price improvement. In addition soon after Peak Volume Levels are reached, we se price trend change once again.

Finally, monitoring the information the market provides on an intraday basis (as Grob109 outlined in a previous post) allows the individual trader to recognize when to enter and exit the trade.

The following post contains an attachment titled The Big Post I - X. The document summarizes the principles behind the PVAD Relationship as described by Jack Hershey on USENET many years ago. After reviewing the document, you should have a clear understanding of the methods Jack describes both here and elsewhere.

http://tinyurl.com/deh4q

Chart Below: Red Volume Bars signify Dry Up Volume Levels. Thin blue line represents price changes of 20% or more. Proper MACD and Stochastic Indicator settings (altered from the default settings) are used as well. Feel free to ignore the blue 20 SMA line on the price chart as it plays no role in Jack's Teachings.

- Spydertrader

<img src=http://www.elitetrader.com/vb/attachment.php?s=&postid=821023>