The Facts on Volume
What’s the use of happiness? It can’t buy you money.
The net effect of commercials, large traders, and small traders can be expressed in two ways. The first is what traders refer to as volume: how many contracts of a commodity traded for a day, week, month, or whatever time period one is studying. Since price cannot move without buying and selling volume, analysts have spent a great deal of time trying to learn how it fits into the equation. (The second way is open interest, discussed in the next chapter.)
It’s very hard to say any one technical indicator is the most misunderstood, as they are all deceitful, often merely placebos and rarely of great value on their own. I would, however, rate volume right up there at the top of the list of old wives’ tales of technical analysis.
How many times have I read or been told that advancing price on advancing volume is bullish, as is declining price on declining volume? Hundreds is my estimate. Just as often, I have read the opposite to be equally true; a rally in price on declining volume is bearish, and a decline in price on increasing volume even more so. Book after book on stocks and commodities have made these assertions, to the point that they are widely accepted as true.
It’s not entirely clear why these assertions have been put forth. They sound logical, I guess, and the comments have been passed from one generation of trader to the next, by word of mouth, books, and now the web pages.
I’m not here ...