Volume based Technical Analysis
Introduction to market timing for indexes and exchanges
Volume analytics is not an exclusive discipline.
It can stand fully on its own, yet may also be used in conjunction
with other technical analysis methods. In fact, this approach
could well be the missing piece of the market analysis puzzle that
so many traders have been seeking.
Volume analytics’ basic premise is that volume and
index behaviors are closely interrelated and that the trading
patterns of an index can be predicted, or at least anticipated, from
a proper understanding of the unfolding volume patterns.
With the myriad of technical indicators, market
timing systems and trading approaches available today, the
question arises: why bother with
volume analysis at all? The answer is that volume is the best
and truest sentiment indicator for what is really going on in
the markets. Volume is the underlying cause of all price movements.
Without a change of volume, the price of a security cannot move. To
make this point, imagine that a (thinly traded) stock does not trade
at all on a particular day. Consequently, that stock’s price might
not even be listed in the newspaper the following day – because if
there is no volume (i.e., no one is buying and no one selling), it
logically follows that there can be no price change (price
movement). On the other extreme, if there is unusually high interest
in a stock, everyone will hear about it, because volume levels will
spike far above normal, signaling “something big and significant”
went on (or is expected).
Without a doubt, a detailed study of volume
patterns has much to reveal, much more than is commonly believed.
One of the reasons volume analytics has not always received the
attention it deserves is that intraday real-time volume data and
charts for entire indexes were not available until recently. Now
that they are, you have the opportunity to closely monitor and
analyze the volume behavior of a particular index, as it unfolds in
real-time. This allows you to heed one of the golden rules of
trading, “Do not play against the market”, which brings us to our
next topic.
Why apply volume analytics to indexes and
exchanges, rather than to individual stocks? Indexes best describe
the mood of the market as a whole. Regardless of what you trade, a
particular index or sub-index, stocks, options, futures, most of
these trading vehicles tend to move in concert with the broad
market. As a rule, the market dictates the direction of a particular
security, never the other way around. It therefore makes sense to
get a good grasp on what is happening at the index or stock exchange
level, and we have found volume analytics to be an excellent vehicle
to make that determination.
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