Volume is a major indicator when analysing markets.
In the Global Chart Research we often mention the important relationship between price and volume. Volume can help determine market direction.
Yet the significance of volume is largely ignored or misunderstood by most traders.
Volume is the fuel that drives our markets.
How can we understand the meaning of volume when markets will go up on high volume one day, then do the same thing the next day on low volume? To confuse things more, price can head sideways or down on the same volume too.
It's easy to see why most traders see volume as an indicator that has little relevance, or is too difficult to read for it to take pride of place in their technical toolbox.
I've heard traders say, you can ignore a volume surge because it's market makers trading amongst themselves, or a fund rebalancing their portfolios via cross trades or special block trades off market.
Whatever funds or professional traders are doing should not be ignored. They leave a foot print. A volume foot print.
Think about this; if Warren Buffett moves into a stock, he'd need to do a lot of buying. In other words, he'd leave a foot print.
In simple terms, bullish volume is increasing volume on up days and decreasing volume on down days. Whereas bearish volume is increasing volume on down days and decreasing volume on up days.
Naturally, volume is more complex than this. Read markets in relation to volume with a holistic view and not on individual bars.
A classic example is when we are looking at a sideways consolidation phase. Is price and volume telling us that this is a bullish energy building exercise, or a distribution process going on behind our backs? How many times have you seen the 'perfect' set up finally breakout, only to see it quickly fail with price heading strongly lower in the blink of an eye?
With an understanding of price and volume, we can recognise when the smart money is creating an appearance of demand whereas they are actually distributing a large parcel of shares they need to get off their books.
Price / volume relationships are important. We will look at more examples over the coming weeks.