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21 May 2022
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Technical Analysis

Importance of Volume and Value

In the science of Technical Analysis, Volume plays a role which is as important as any other basic indicator. An increase in the volume in conjuction with Stock price moves adds strength and momentum in the direction of the move. It reflects the market's confidence that the uptrend will continue in force, or its pessimism that the downtrend will.

For the market, declining volumes as the market rises is supposed to warn the end of a BULL MARKET. Likewise, sharp increase in volumes resulting in Selling Climax, signals the end of a BEAR MARKET.

An increase in abnormal volume can alert investors to coming price movements, Up or Down, before it becomes obvious to the overall market. Therefore, the market axiom "Volumes Precedes Price."

Historically, the majority of BULL MARKETS have originated with atleast two days within two-month period where upside volume is atleast nine times greater than the downside volume. Investors who track volume and spot the two-day Exceptional Upside Indicator can out-maneuver other investors and earn excess returns by positioning themselves for the coming Bull Market.

Basic Volume theory includes the following maxims:

  • Increasing Volume with an advance is Bullish
  • Decreasing Volume with a decline is Bullish
  • Increasing Volume with a decline is Bearish
  • Decreasing Volume with an advance is Bearish
  • A Market Top is imminent when heavy volumes occurs with little or No Gain in the averages.
  • Heavy Volume confirms the direction of price breakouts from a Support or Resistance Zones.
  • An increase on heavy volumes after a previous substantial rally signals a "Blow Off" with an impending top and Reversal approaching.
  • Heavy Volumes accompanied by an accelrating drop in prices confirms a "Selling Climax" and impending price reversal after the panic selling subsides.
  • Low volume periods after upward price reversals reflect a Consolidation Phase before resumption of the Upward Movement.

The Daily Volume Indicator measures extremes in the Supply/ Demand relationship. If a Stock closes at the mid point of its trading range for the day, the indicato reflects no change. Closing Price above or below the trading range midpoint show an increase or decrease in the Daily Volume Indicator, respectively.

In constructing the Daily Volume Indicators, Technical Analysts take into account the day's volume, closing price, Distance between closing Price and the mid point, and the Trading Range.

These are just the basic characterstics of the Volumes, these must be read in conjuction with other commonly used indicators before drawing up any conclusion.

» In Case of Breakout » Importance of Value » Futures & Options » When to Trade

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