T2W Trading Community

Understanding the way volume affects the market is key to successful trading, as price signals won’t always tell the whole story. Professional traders have one advantage over the private trader: they can read volume. Not only that but they can – and will – hide volume from you to give themselves an advantage. Large banks and brokerage houses claim that to make a market, they need an edge over the rest of the crowd. Large orders that are processed do not appear on the tape, as they would show up on the radar of other professional traders who would then change their bid/offers or pull orders. 

The professional trader uses price and volume, and usually no other indicator, to read the true balance of supply and demand, as Richard Wyckoff preached at the turn of the century. The study of price and volume and their relationship is vital to detect turning points in the market, as professional operators have large amounts of capital and need to work this capital to make money. This cannot be done by buying at the market or limit orders as it would destabilise prices, causing an unreadable situation.

‘Whip-sawing’ – prices marked rapidly up and down – is used to shake out the crowd and catch stop losses, but the real reason is to process large orders while covering any strategy and not giving the game away at the same time. When the market starts to trend, we say the large operators have control. They know that there are thousands of stop losses out there waiting to be triggered. This gives them the opportunity to process large orders and conceal their true intentions as they attract other traders, who can see their actions and act immediately to better their own accounts by reading volume. For example, ultra high volume on a down bar should stop the decline, with demand swamping supply.

The other advantage professional traders will have is the news: they will already have positioned themselves in advance of news and will try to wrong-foot as many traders as possible, gunning for stop losses and misleading the crowd into thinking the opposite of their true intentions. Why is it that bad news always appears in the last two weeks of a bear market and good news always at the top of a bull market? It is done to put you under pressure at the bottom and to make you hunger for more at the top of a bull market. This allows the operators to unload large blocks of stock or futures contracts at the best possible prices and to reaccumulate at the bottom to increase profits – usually at a large loss to the crowd. The cycle is then repeated over and over, giving us bull markets and bear markets – which is why you are bombarded day and night with news on earnings, unemployment and payrolls.

These operators know that you are ruled by three things in the market: fear, hope and greed. Fear of missing out, hope that when you are losing prices will recover and you can close out at break-even and greed that when you have a profitable position you hang on for greater profits and often fail to see the tide coming in.

By studying volume and its relationship to price, you can begin to detect subtle changes in supply and demand. You will see when the large operators are active and, by observing the results of their actions, you should begin to see a picture of the ongoing market unfolding before you in a trading session. Let’s say you are sitting in front of your computer one day, watching a bar chart, and you see a large amount of volume on an up bar. You will – because you have been told this is so – assume that strength always appears on up bars and weakness always appears on down bars. But in fact, up bars with excessive volume are a sign of weakness, as down bars with high volume show strength.

But how can this be true? Imagine you are an institution with a large block to dispose of: how can you do this without moving the price against you? Answer: by marking up the price to bring in buyers. Rising prices create demand, demand does not create rising prices. If you see prices rising, you are more likely to buy than sell as you will expect to make a profit as prices continue to rise. But if you cannot read volume, your image of these rising prices will distort the true picture: you will not see the excessive volume indicating weakness.