Friday, March 24, 2017

Breaking The Myth About Volume


If you wait for the volume to increase, you are actually getting in late. It is not a leading indicator, it’s not a leading indication. It’s not a leading anything. It’s often late to the party. So I’m getting in before the big volume comes in. the big volume is great but see you would really have to suffer through this move against your position, against these lows, psychologically that can be very challenging to deal with.


If we have another obvious surge of volume as in A12 bar. And what is that? Well the market’s actually coming down. That occurs on this red long tail bearish bar. So we’ve got this level of volume in there. It finally breaks out above that. But it breaks down, or it breaks out on a red bar, while the market’s coming down. And so that would almost make one think, well maybe some big short selling is coming in. No, that’s not at all what happened. In fact it didn’t move down much beyond that at all.


And then the next obvious big surge in volume comes in on another bar. Again late to the party. Not early at the cycle low. Not even at the break out. And so it occurs in about the middle of the move. Hardly a leading indication. And so that’s the second thing wrong with that statement is it is not leading at all.

It’s not a calculation. So first of all calling volume an indicator is wrong.

Number 2, it is not leading. It is actually often lagging. So let’s take a couple of looks at that. And I’ll explain to you why it’s lagging. Especially today.Volume is just what it is. The number of shares in the stock market or lots, or contracts, or forex, or futures that are traded. So it’s not an indicator it is actual fact. So it’s not a derivative of anything.


Here’s an illustration of what I was talking about before, for exhaustion patterns when doing stock market volume analysis. Here’s an exhaustion pattern after 11 Peak, market gap down.

We get a nice sound exhaustion pattern candle stick at A12, big volume coming in. now again some people would say, oh that could be a beginning of a new up move. And I said, no it can just go sideways, here it does.


It goes sideways for a while and this is a daily chart, so 1, 2, 3, 4 5, 6, 7, 8, 9, 10, 11, 12, almost about 2 weeks actually. Little more than 2 weeks actually, because these are trading days. So just consolidates for over 2 weeks, and then it goes down a little bit more.


Just because you get in exhaustion pattern type volume, that’s not in and of itself a good reason to take a reversal trade, or in this case to buy. So let’s finish up talking about why this is happening. Why this is true, why it’s so counterintuitive. And why it’s against traditional teaching.


The reason is actually very simple. Volume as a leading indicator just is NOT even accurate. It doesn’t work. It’s not reliable. And the reason is, hold on to your hats.


The primary reason, the big picture is that the big institutions, the big players, pension plans, everybody’s trading this huge money. They don’t want to be trapped. And they know that if they come in with huge orders, everybody in the world looks down there and they can see that volume histogram and they are going to use that. They say, "Oh the big boys are coming in." They don’t want you to know when they are coming in. so they do a couple of things.


One thing they do is they come in through various means. In other words, they are not going to just buy, in this case 'Disney', they are going to come in through various markets, through various exchanges, through different financial instruments. The other thing, and they might do it overtime with accumulation.



The other thing though that a lot of people are NOT aware is dark pools. What are dark pools?


Dark pools are non-exchange trading in the markets. So it’s basically institutional investors who want to buy or sell huge, maybe a million shares of a stock. They don’t want you to see that. So they actually will go to a dark pool. Which is basically private exchanges or forums, for trading stocks.


It’s not a public stock exchange. So the volume, that they are trading, they are trading it but it won’t show up down here on your volume histogram. And by the way they are a big deal. This is not something that’s just occurring on a small scale.


In fact if you did a little research on this, at Investopedia it said that in 2014, Non-exchange trading in the US accounted for about 40% of all US stock trades. 40% !. So how can you rely on volume when 40% of the volume, and that by the way, 40% is not the little guy. That 40% are the big institutions. The pros, the whales, the smart money, the big pension funds, the hedge funds. The smart money is not showing up here my friends. And that’s why volume is very deceiving, not only it isn’t reliable, looking stock market volume analysis can actually be very deceiving !

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