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Volume In Technical Analysis
Traditionally, not a lot of traders are paying attention to the volume based technical analysis. Historically, majority of indicators were developed to analyze price movements. There are several reasons why fifty years ago retail and professional traders' main focus wad price analysis only.
First reason is the volume gaps. Half of century ago, the stocks were not trader as actively as they are traded today. Therefore, intraday volume data on many stocks had gaps - when volume equal zero. When you apply technical analysis to price you may see nice smooth picture, yet, when similar technical indicators are applied to volume that has gaps you will have disordered picture which make extremely difficult to pull out something logical from it.
Second reason is the low volume. When it comes to the low volume stock, as a rule it is a common to see big number of volume spikes. One trading period you may have volume equal 10K, another trading period it could be 50K which is 400% rise. The same as in case with volume gaps, such volatility in volume makes it difficult for analysis.
Fifty years ago the main technical analysis was done on the daily data and indexes and exchange were only the trading vehicle that had more or less stable volume flow that could be analyzed. However, at that time nobody provided volume for indexes and exchanges and this is the third reason why volume analysis was not very popular at that time.
I think, the first serious input into volume analysis was made by Marc Chaikin. At that time, he already understood the importance of volume analysis. Accumulation/Distribution, Chaikin Money Flow and other volume based technical indicators developed by Marc Chaikin were directed to measure the flow of the money - whether the investors coming into the market or they are leaving, to measure how actively stock or index was traded during an up-move or during a decline - whether enough money were injected into stock to make it overbought or whether enough were pulled out to make a stock oversold.
By its nature volume allows to track and measure the trading activity and reveal changes in this activity. Correct interpretation of volume analysis allows seeing the moments of sentiment changes - when investors stopped injecting money into stock and started to pull them out or when they do not sell any more in panic and started to buy.
Nowadays there are no problems with volume data. Trading activity of stocks is much higher than fifty years ago. Volume data for indexes (S&P 500, NYSE, DJI, Nasdaq 100, etc) became available. Due to the average high trading volume there is much less stock that have volume gaps and spikes. All of this has made volume analysis available to the wide range of investors.
Professional and institutional trades already started to use volume based technical analysis in junction with price based technical indicators a decade ago. More and more trading systems base their signals on volume indicators. NYSE volume was the first volume from the group of indexes and exchanges that professional analysts started to pay attention to. Now, volume of S&P 500, Nasdaq 100, Nasdaq Composite indexes has become equally popular.
Still, as was mentioned in the beginning, majority of retail traders, historically are stuck with price analysis and they base their trading decision solely on price technical analysis. The question is why? Trend is always described by price and volume and if you analyze price only you see half of the picture only.
About the Author
Independent professional stock market technical analyst. Visit my personal technical analysis blog based on volume and advance decline technical indicators applied to the indexes and exchanges. The information in my blog could be used for educational purposes of QQQQ, SPY and DIA traders.
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