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.