Volume
Overview
Volume is an indicator that is often used in conjunction with price action indicators to help determine
the strength of the signal. High volume indicates a large number of traders (or very large traders)
buying and selling the asset. It may be thought that for every buyer there is a seller, so
volume would not indicate anything. However, it is important to remember who the
market players are who are doing the trading.
In particular, some of the market players are market makers,
meaning, they will fill any order that comes to the market. Often these participants are not as informed as
the institutions who trade with them.
When the large informed players decide that an asset is overvalued
or undervalued, they tend to begin trading in the same direction. The market makers will trade with them, but
they typically will begin to adjust their prices as the volume comes in.
Therefore, if the price moves strongly in one direction in conjunction with high volume, this is thought to
be the informed institutional players lining up on one side of a trade.
Price Confirmation
Large volume is thought to confirm a trend in the dirction of the price move that ocurred on the day of large volumne.
Of course, what is considered large is dependent on the asset being traded. Therefore, it is typical to
compare a days volume with a moving average of the volume over a window of time prior to the day in question.
Oscillators that are used to determine overbought or oversold price conditions can also be used to determine when
the volume hits an extreme level. As a common example, the logic behind the
stochastic oscillator can be applied to volume
as well.
Indicators
- High Volume
- high volume by itself is seen as confirmation of whatever happened on that day. A price move is confirmed, and
sideways action confirms the current price. High volume is sometimes thought to indicate that the market is poised to
move.
- Price Move with Expanded Volume
- a price move accompanied by expanding volume is seen as an indication of confirmation of the move.
- Price Move with Diminished Volume
- price move with diminished volume indicates that the current price move is weak and a reversal is possible.
Strategies
