Volume Analysis

In previous lessons you gained a new perspective for looking at Candles, Chart Patterns and Indicators. Use that perspective while studying this lesson to establish a clear understanding of what volume means.

The definition of volume:

In the stock market, volume refers to the total number of shares that exchange hands over any given time period. In any volume bar several types of transactions might be taking place all at once. They are : buying, covering short sells, selling, selling short.

VSA is not volume analysis, price spread analysis, nor volume and price analysis on a single bar or candle. For instance: high volume on an up move does not necessarily mean the next move will be up. There could have been hidden selling within that move. By itsself and on a single bar, volume only shows the relative amount of activity on that bar. But, in context with other information, volume is the most powerful indicator in the final analysis before taking a position.

"It [volume] is often looked at for confirming evidence of price trend and price reversal patterns. For patterns such as triangles that are the product of a period of indecision or consolidation in stock price, volume is usually light during the formation of the pattern and increases on a breakout from the pattern. For any pattern or trendline penetration, a breakout with increasing volume is more an indication that prices will continue in the direction of the breakout than a breakout on low volume."
[Trade10.com]

This is a good time to introduce Tom Williams' perspective on The Path of Least Resistance:

1. It takes an increase of buying (demand volume), on UpBars, to force the market up. The appearance of No Demand (low volume) on an up-move, shows little or no buying.

2. It takes an increase of selling (supply volume), on DownBars, to force the market down. The appearance of No Supply (low volume) on a down-move shows little or no selling pressure.

Which means, if there is no trading going on in one direction, the path of least resistance is generally in the opposite direction.

VSA is the combination of analyzing volume to the price spread and close in the context of the background which includes the general market and multiple timeframes.

In general low volume is the playground of Smart Money. This is where they have the resources to run tests to discover the degree of supply or demand, or set traps and shakeouts against the greater resources of the Herd and trying to create as much confusion in the Herd as possible. High volume means that Smart Money is decided and working at a specific purpose of manipulating the crowd psychologically: they are inducing fear and gaining greater profits.

Volume is the single most powerful confirming technical indicator because it is the only indicator which is not calculated from price. Strong volume during trading day indicates important market action. You have to pay particular attention to market action when you see high levels of volume during these situations:

1. The market is breaking a significant level of support or resistance.

2. The market is bouncing from a significant level of support or resistance.

Do you see where the arrows point to important volume and when it happened?

a. high volume when bouncing from support level
b. high volume during breakout of trendline resistance
c. again high volume during bounce from support
d. breakout of horizontal resistance with above average volume

But you can also find above average volume in situations when a trend is already running.



(Tom Williams )