The Power and Strength of Volume Analysis

Volume is a tricky subject for me to talk about. The power and strength of volume analysis cannot be overlooked. Unfortunately correct volume analysis is not always what is preached and/or marketed on TV to the general public. As a result, traders will incorrectly hear off-the-cuff remarks from TV pundits and other bloggers who are just starting out in their short careers.

Volume is a reflection of Supply and Demand

The correct use and application of volume analysis will surely create insights into price action, especially when one is swing trading or leaning against support and resistance areas. But as always, price action will come down to two things: Supply and Demand.

The Biggest Misconception About Volume

The first thing you must understand about volume is that it’s not just the volume by itself we’re interested in. Sure it’s really cool when a stock trades 5 Million shares in 10 Mins, but that’s not what matters in and of itself. And here’s the biggest misconception:

For every buyer there is a seller therefore volume is null and void.

This is completely and utterly ridiculous and I’m sure most of you are sitting at home reading this with your jaw on your desk – how can he say such a thing? What the heck does he know that I don’t? If that were really the case then prices would simply not move.

Think of volume as the effort of one side and the price activity as the result of those efforts. If sellers are desperate to exit and there is not much buying demand, then prices are going to be driven lower until those sellers are fulfilled with completed orders. Conversely, if buyers are desperate and there is not much supply, then you will see prices move up until those buyers are fulfilled with completed orders.