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Volume Analysis

Volume Analysis introduction

Following is a brief introduction to the discipline of volume analytics, the cornerstone of our market analysis approach. The next several paragraphs will introduce you to the great benefits of incorporating volume information into your trading decisions, show you what a study of volume patterns can reveal about the market, and explain why we apply volume analytics primarily to the major U.S. indexes.

Terminology

Just as every discipline has its own unique jargon, volume analytics has created a specialized terminology which we use to communicate our ideas. The following paragraph introduces you to a small number of special terms we have created - all centered on volume. Getting acquainted with these few specialized terms is not difficult at all, and the insight you will gain from a study of this material is well worth the time you invest in familiarizing yourself with it.

VMA Classification

The following paragraphs deal with market episodes where surges in the volume moving average occur - we refer to them as “VMA spikes”. While there are some VMA spikes that can have long-lasting effects, many volume surges will impact the market only for a brief time. When you see a VMA spike on a chart, it is therefore vital that you place it into the context of higher timeframes; this will allow you to determine whether (and how) a particular spike might impact the market - over the short-, mid-, and the long-term.

VMA Spike Parameters

The following section introduces you to some of our specialized terminology that deals with spikes in the volume moving average (VMA spikes). Understanding these few terms will greatly enhance your understanding of volume analytics - you will never see the market in the same way again.

The relationships between volume spikes and index reversal points

What we teach in the following has direct implications for your trading. This section introduces you to the basic relationships that exist between volume spikes and index reversal points. In other words: How will a market react to the appearance of volume spikes, and what are some of the things you must look for? The most fundamental statement we can make about volume analytics is that there is a direct, visible, and often quantifiable correlation between surges in volume (i.e., trading phases characterized by considerably elevated volume activity) and the corresponding patterns of an index. This cause and effect relationship - which we will explain in some detail - is a key underlying principles on which we have founded our volume analysis methodology.

 

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