Volume Analysis
- Thread starter melteye
- Start date
DBPhoenix:
Regarding the "untested mythology" that I refer to, here is one example.
In January's edition of Stocks & Commodities, Dr. Trongone tested the idea of holding QQQ trades overnight. In his article, the author points out that according to traditional wisdom, rising prices on expanding volume indicates additional price increase in the near future. Unfortunately this was not true for the QQQ market (during a 368 day test of that market). Now this sample is not large enough (in my opinion) to be relied on for the long term, however it points to a problem with the traditional assumption. Also it corresponds to my experience that certain "common sense" ideas about the markets are likely to be either untrue, or conditionally true (true for a while).
Regarding your second statement, I don't really understand what you mean. I simply want to point out that testing is the only way to verify whether an opinion about a specific market is useful(adds value, or can be traded). Thanks for asking. Best Regards, Steve46
Regarding the "untested mythology" that I refer to, here is one example.
In January's edition of Stocks & Commodities, Dr. Trongone tested the idea of holding QQQ trades overnight. In his article, the author points out that according to traditional wisdom, rising prices on expanding volume indicates additional price increase in the near future. Unfortunately this was not true for the QQQ market (during a 368 day test of that market). Now this sample is not large enough (in my opinion) to be relied on for the long term, however it points to a problem with the traditional assumption. Also it corresponds to my experience that certain "common sense" ideas about the markets are likely to be either untrue, or conditionally true (true for a while).
Regarding your second statement, I don't really understand what you mean. I simply want to point out that testing is the only way to verify whether an opinion about a specific market is useful(adds value, or can be traded). Thanks for asking. Best Regards, Steve46
He has at least two premises here. One is that prices on expanding volume indicate aditional price increases in the near future. The other is that this is traditional wisdom. As to the latter, perhaps so, since there are certainly a great many people who don't have the slightest idea how to interpret volume.
But as to the first, there are so many qualifications as to make the statement near-meaningless. Yes, expanding volume on rising prices CAN indicate or suggest further rises. But that volume can also suggest wholesale distribution, leading to either a price consolidation or an outright collapse.
The key to understanding volume is understanding the nature of demand and supply. There's nothing magical about high volume. There is a seller for every buyer, and vice-versa. Therefore, one must remember that volume represents shares traded. It represents transactions in the marketplace. Whether there are a lot of transactions or a few is in and of itself immaterial. What is far more important is the RESULT of all those transactions. Equally important is the follow-through, if any.
There's too much here for posts. Entire books and courses have been written on the subject. Those who are interested can do the work and ask questions. Those who are looking for "if this happens, do that" are going to be disappointed.
But as to the first, there are so many qualifications as to make the statement near-meaningless. Yes, expanding volume on rising prices CAN indicate or suggest further rises. But that volume can also suggest wholesale distribution, leading to either a price consolidation or an outright collapse.
The key to understanding volume is understanding the nature of demand and supply. There's nothing magical about high volume. There is a seller for every buyer, and vice-versa. Therefore, one must remember that volume represents shares traded. It represents transactions in the marketplace. Whether there are a lot of transactions or a few is in and of itself immaterial. What is far more important is the RESULT of all those transactions. Equally important is the follow-through, if any.
There's too much here for posts. Entire books and courses have been written on the subject. Those who are interested can do the work and ask questions. Those who are looking for "if this happens, do that" are going to be disappointed.
You might try this site although I couldn't see how they arrived at their market calls without hindsite.
http://www.marketvolume.com/
http://www.marketvolume.com/
This is where DB nails his point home. Volume interpretations are interpretations that give those that can read them and know what they are reading the edge over those that can't. Will every read be a positive outcome? Of course not..trading is probabilities, not certainties. We never know how much supply is waiting for us above breakout points or where that supply shows up..all we can do is assess volume indications that give us a signal to enter. The rest is up to the market, our risk/capital control and profit targets that we know offers consistency "X" percent of the time.
It's not accepted by pros that common wisdom is that everytime a volume increase on a break gives profit..it's that X percent of the time in my trading strategy it gives profit. Therefore, I would not dismiss the edge that volume analysis offers me. If others wish to, great. I don't care as I don't have anything to prove to those that don't wish to use it.
If your contention Steve is that we have to track these to know the percentages..well..of course. This is the nature of recording our trades. Trade analysis. Something many also don't do.
Chris
P.S. DB, thank you for the comments on the book.
Same thing applies to candles, and I bring up the subject because they are such a nice fit with volume analysis (Wyckoff would have loved them). And given the number of people who post here wanting to know about "the best patterns", it seems clear that there are many people who attach a certain significance to a shooting star or a hammer, for example, without having the slightest idea what they represent in terms of the demand-supply dynamic (if they did, they wouldn't ask the question).
Wrap all this up with a probability bow and you can be dangerous.
Like everything else it seems to be more art than science. What confuses me about it is that for every buyer theres a seller and huge volume mean a lot of people are buying AND a lot of people are selling. Who's right? I"ll have to get your book and check it out. I would certainly love to find some leading value in it.
Best I can describe this is volume at the offer price is buyers..those who are selling or distributing are doing so at the offer price..eventually those selling/distributing at the offer figure out they can sell at higher prices so they lift their offers. Then we get into the whole nature of competition between MMs at price levels. Do they sell all they have at the current offer with no competition (price doesn't rise) or do they lift their offers where other MMs are and compete to sell their shares at higher prices. This is where the "volumes" began to be written..pun intended.
Chris