Practical Technical Analysis (2006) Chapters 8-10
Chapter 8 - Psychology of Price and Volume
Price and Volume
- Prices rise: buyers are willing to buy higher, sellers are only willing to sell higher.
- Prices fall: sellers are willing to sell lower, buyers are only willing to buy lower.
- Each price tick reflects two transactions: a buy and a sell.
- Activity of traders and investors.
- Each unit of volume reflects action of persons: one buys from another person who sells.
- Reflects the degree of emotional enthusiasm among buyers and sellers.
- Volume plotted as a histogram under price.
- Do not ignore volume
- If price is the most important indication, volume is as important.
- Price movement must be confirmed by volume.
- Rising volume during a rally
- More buyers and short sellers are pouring in.
- Buyers are eager to buy even if they have to buy higher and pay up.
- Shorts eager to sell to them.
- Rising volume shows continuous replacement of new bears but scrips are continuously eaten by bulls.
- As price moves higher, volume shrink
- Bears are no longer shorting as they can't take the pain of losing.
- Falling volume shows that 'energy' is being removed from uptrend.
- Trend might no reverse immediately but hints given.
- When volume dries up during a decline
- Bears are less eager to sell short.
- Bulls are no longer running for the exits as they would have already sold higher. Weak bulls are shaken out too.
- Falling volume shows that remaining bulls have a higher level of tolerance.
- May indicate downtrend/fall is likely to reverse.
- Burst of extremely high volume
- Critical points, important news.
- Bailing out of losers/winners.
- Suggest current trend is nearing an end.
Story - "High Volume Exposed: Four Killer Scenarios Stock Traders Should Care About" by Soh Tiong Hum
Invest Magazine Issue 10 August/September 2009. Click here for PDF version.
Chapter 9 - Trading Rules with Volume
Price and Volume - Trading Rules
- 'High volume' and 'low volume' are relative
- Volume typically goes with the trend e.g. rising, falling volume trend.
- Volume is always interpreted in relation to the recent past.
- Rising volume, rising prices are normal
- Market is in gear, no forecasting value.
- Reasonable to expect at least one more rally that reaches a new price high when volume does not.
- Volume leads price during a bull move
- A new high with low/no volume is a red flag - highly suspected.
- A market that rallies on trend of lower volume indicates that prices are rising because of a lack of sellers than enthusiasm of buyers.
- Sooner or later, market will reach a point where sellers are motivated.
- Decline can persist on low volume
- Bears continue to sell at a lower price, bulls not eager to buy.
- Rising volume, falling prices
- Sellers are more motivated.
- The decline, other things being equal, likely to be more severe.
- Downside breakout from a price pattern, trend line or moving average with heavy volume is a bearish sign
- Usually confirm reversal in trend.
Chapter 10 - Special Volume and Price Formation
- Price trending down.
- Accelerate price in fall with expanding volume.
- Low created is unlikely to be that easily violated for a considerable time.
- Price rise from a selling climax can be accompanied by declining volume.
- Termination of bear market is often (not always) accompanied by selling climax.
Low volume on test
- Prices advance following a long decline.
- Then fall again to a level slightly above, or marginally below, or same level as previous bottom.
- Bullish signal if volume on second bottom is significantly lower than volume on first.
- When previous low is being tested with low volume, implies complete lack of selling pressure.
Technical lessons from biggest Singapore stock market fall in 2013