Why does Volume matter? Isn't non-involvement from institutional buyers itself a signal?

[userque]

So far I like to observe volume spikes as confirmations or exhaustions of trends, but I'm starting to wonder what the logic is behind it, given that there is so much money or holdings on the sidelines. If institutions witness significant movement yet don't engage, isn't that as much of a confirming signal if there's low-volume? They essentially are fine or don't feel the need to trade against a low-volume trend.

You've asked three questions:

Why does Volume matter? Isn't non-involvement from institutional buyers itself a signal?

I don't know.

I/We also don't know why matter curves space-time (or, iow, why gravity exists). Yet, we rely upon it all the time, and can reliably calculate it well enough to lob missiles accurately.

And to join the voting regarding the unasked question as to 'does volume matter:' It depends on how you are using it.

For some folks, in the ways that they've used/tested volume, "it doesn't matter."

I, for one, have run trading algorithms with volume as an input--and without. It mattered--depending upon the premise of the algorithm. It wasn't crucial...but using it improved the results. (Keeping in mind that the algos didn't use it in the same way as traditional T/A uses it.)

If institutions witness significant movement yet don't engage, isn't that as much of a confirming signal if there's low-volume?

I haven't given this any thought, so I don't have an answer.

 

[i960]

Let’s not forget about the concepts of “buyer’s market” and “seller’s market.” Meaning that when prices are high sellers are actually the ones in control as they demand a higher price and buyers are the ones lifting that offer. Vice versa in a buyer’s market buyers demand a better deal to get long and hence sellers are forced to come down in price in order to transact any business. This is also why it’s very common to see “price move to size” more often than not.

Another way of looking at it: If you want to buy something and the price is not low enough you either demand a lower price and the seller agrees or you wait until you find a better deal. If there’s enough like minded individuals sellers will have no choice but to lower prices if they actually want to do any business. If there’s not enough like minded individuals then the sellers are still in control and hence price stays steady or rises.

Sure during periods of manias or panic selling you’ll see price insensitive buyers lifting offers and sellers hitting bids with abandon - but I’d argue this is not the normal state of markets, hence not a good view to orient oneself around. Yes, in the end, FOMO and loss aversion rule markets but it doesn’t necessarily mean that the markets are openly dominated by it all the time and/or on all timeframes.

 

[Sprout]

Two points:
-- we're *all* "sitting on the sidelines, waiting to enter" -- right up to the point that an order crosses to hit us. And then, "Poof!" we're gone! {multiple orders, aside.... }
-- by conflating buyers with "Bulls" and sellers with "Bears", we (in this thread) have confused the issue. I think, if we just substituted buyers and sellers into the appropriate spaces above, we'd all be pretty much in agreement.

For example, a "Bull" buyer wants to buy low, may hang back to see if the mkt will drop a bit and give them some free breathing room -- they wait, they waitttttt, and then "Pop!" They're in.
And now they are sellers! And feel increasingly bearish as the stock (for example) drifts up. They see 20 pts go by... 22.... 26! And now it's outright skepticism! 27pts is too much! I'll put my [long] exit at 28! 27.80.... 27.45..... And now that Bull has acted like a Bear, marching their order down-doobie-do-down-down........"Ding!"

Supper's ready!



"Exactly!" So, whether "Bull" or "Bear" is a lot less important than whether you're holding or not, and then how you're looking to exit.

Howd eye dew?

Let’s see,..

For every transaction there is a buyer and seller so those distinctions don’t appear any more helpful than the bulls or bears.

We only know the more aggressive of the two crossed the spread and paid the premium in exchange for having a position now and not lose out on opportunity cost.

The aggressive trader uses market orders and gets filled when passive traders are not ( at turns.)

Of the buyers there are those whom are already in and actively accumulating, already in and taking profits. Traders holding are not buyers or sellers yet. Only until they submit an order do they have any effect.

Any buyer is only a buyer if they expect the price to improve after they have committed. Until then they are on the sidelines and have no effect. They could play around with adding and subtracting orders at various levels away from the current two-pair of price. It only has an effect when the ephemeral adding/deleting crystallizes into a solid wall on the DOM and price reversed before or after attempting but failing to ‘eat’ through it. The limit orders of the passive buyers on the other side do not get filled and left watching dust as price takes off in their intended direction but without them. This could be an sudden move, but more likely a migrating drift.

Of course, if I’m passive bullish, I’m always looking to buy low and sell high. If I’m more aggressive I’m equally likely to buy high and sell higher. Just by virtue of being a bull.

So at the start of the day one has a bullish bias and enters straightaway. At the end of the day price improved. To say the sellers controlled the day because buyers had to pay a higher price discounts the fact that the only folks who extracted profits were the early buyers cashing out at higher prices. Even by not cashing out their position has improved. A seller can only be a seller if they have something to sell.

So if at the start of the day the bias is bearish and one enters straightaway, this same day my selling at the end on the day ends up in a loss.

As a sidelined seller I could think I’m controlling the day by not entering, but I’m only a seller if I have something to sell, meaning I’m already in.

How good of a seller would I be if everything I sell I buy at a higher price? Not so good. Which means I have to buy at a low price. To buy at a low price with the intention to sell at a higher one is what someone bullish wants to do. In this case a bull in a bear suit.

So what looked like just bulls and bears is also bulls in bear suits and bears in bull suits.

Just be mindful where you step!

But how does this reconcile the saying as it appears in RE? A sellers market is one where there’s not enough inventory for demand. So in this case what you suggest would be true. By not participating as a seller my asset increases. But again as a seller you have to have something to sell.

But whose controlling price?
The majority by their demand or the minority by their supply?

Also the corollary, the majority by their supply or the minority by their demand?

What is the the one thing that makes crossing the spread and paying the premium worth it?

In both cases it’s the minority that controls price by the variable that unites price and volume in a relationship.

Only the minority understands the importance of this variable.

Only the minority uses market orders to capitalize on this variable.

Paradoxically this variable consistently changes and changes consistently.

It’s the only variable that can be consistently and accurately predicted in the PV relationship.

 

[kj5159]

Let’s not forget about the concepts of “buyer’s market” and “seller’s market.” Meaning that when prices are high sellers are actually the ones in control as they demand a higher price and buyers are the ones lifting that offer. Vice versa in a buyer’s market buyers demand a better deal to get long and hence sellers are forced to come down in price in order to transact any business. This is also why it’s very common to see “price move to size” more often than not.

This is what I have seen and read, the price moving to size idea makes sense. Although Sprout if I'm understanding you correctly I think it may be referring to the inverse of the same idea. On one hand you have the "price moves to size" idea and on the other you have the "absence of activity = waiting for more favorable terms" idea, looks to me like they're two sides of the same coin. The "size" order(s)/price level would be the physical manifestation of the "more favorable terms" scenario, because that's where the size is, no?

For instance having XYZ stock trading at $50 with a huge amount of buy orders sitting at $45, the would be buyers are "in control" via their lack of activity between $45 and $50 which allows, theoretically, selling to knock price down to $45, thus the "minority" was in control AND the stock also "moved to size" since there is less resistance until hitting those orders.

 

[SunTrader]

Way too much thought is going into this. The only way to get it is to put in the time watching a chart, time and sales and a matrix. There are no absolutes in trading.

 

[Sprout]

This is what I have seen and read, the price moving to size idea makes sense. Although Sprout if I'm understanding you correctly I think it may be referring to the inverse of the same idea. On one hand you have the "price moves to size" idea and on the other you have the "absence of activity = waiting for more favorable terms" idea, looks to me like they're two sides of the same coin. The "size" order(s)/price level would be the physical manifestation of the "more favorable terms" scenario, because that's where the size is, no?

For instance having XYZ stock trading at $50 with a huge amount of buy orders sitting at $45, the would be buyers are "in control" via their lack of activity between $45 and $50 which allows, theoretically, selling to knock price down to $45, thus the "minority" was in control AND the stock also "moved to size" since there is less resistance until hitting those orders.

If one thinks that the buyers are in control when price is decreasing. I have as much to sell as you want to buy.

If one thinks that the sellers are in control when price is increasing, I also have as much to buy as you want to sell.

For each of the two above cases, volume can be increasing or decreasing. One case implies the price trend will continue, the other implies the price trend will change.

 

[tommcginnis]

Not to quibble (in the least) but,...

Of the buyers there are those whom are already in and actively accumulating, already in and taking profits.

-- if they're taking profits (as previous buyers), they're sellers.

Traders holding are not buyers or sellers yet. Only until they submit an order do they have any effect.

If they're traders who are holding, they are most certainly in the selling pool in this construct -- you cite their effect further down, when you describe what happens when inventory is kept off the market. [This in no way precludes them from being further/continuing buyers in this market, as noted previously.]

A seller can only be a seller if they have something to sell.

...unless they short-sell, which has even driven exchange rules around world, to cut market effects when short-sold inventory (volume) affects perceived market signal clarity.

But whose controlling price?
The majority by their demand or the minority by their supply?
Also the corollary, the majority by their supply or the minority by their demand?
What is the the one thing that makes crossing the spread and paying the premium worth it?
In both cases it’s the minority that controls price by the variable that unites price and volume in a relationship.
Only the minority understands the importance of this variable.
Only the minority uses market orders to capitalize on this variable.

...in my opinion, a well-stated summary, provided their price elasticity is roughly equal. (For counter-example, there is much more blood supply than bleeders demanding it. But nobody is expecting blood to go down in price, nor would anyone expect bleeders to price-shop. )

I crack me up......

 

[i960]

If one thinks that the buyers are in control when price is decreasing. I have as much to sell as you want to buy.

If one thinks that the sellers are in control when price is increasing, I also have as much to buy as you want to sell.

For each of the two above cases, volume can be increasing or decreasing. One case implies the price trend will continue, the other implies the price trend will change.

The side *causing* the other side to be aggressive is in control. On the surface it may appear that the aggressor side is in control because they’re crossing the spread and hence moving price but you don’t even need a single trade for the market to move. If sellers have to move to where the buyers demand then buyers are in control. It’s not shorts saying “I want to drive the price down so let’s all just sell to teach the longs a lesson.” It’s a market not a conspiracy.

 

[kj5159]

Way too much thought is going into this. The only way to get it is to put in the time watching a chart, time and sales and a matrix. There are no absolutes in trading.

Yes

 

[stepan7]

The side *causing* the other side to be aggressive is in control. On the surface it may appear that the aggressor side is in control because they’re crossing the spread and hence moving price but you don’t even need a single trade for the market to move. If sellers have to move to where the buyers demand then buyers are in control. It’s not shorts saying “I want to drive the price down so let’s all just sell to teach the longs a lesson.” It’s a market not a conspiracy.

Sprout is right here.
It's other way around.
On the rising market Sellers are in control: "Pay the higher price or we are not selling to you". And it does not matter who The Sellers are - short-sellers or folks with accumulated inventory.
On the falling market Buyers are in control: "Lower the price or we are not buying from you". Same here - it does not matter who The Buyers are - short-seller covering or folks accumulating new long positions.
The picture changed at the Top - there are not more willing Buyers to pay higher price (think Sotheby's art auction - final top bid and auction ends). Market turns down.
And at the Bottom - remaining Sellers refuse to accept lowered price. Market turns up.
It's the basic of Action Market Theory - market is constant two way action.