HOW TO USE VOLUME WITH
the theory behind volume states that the greater the volume, the greater the force behind the move. As long as volume increases, the current price trend should continue. If, however, volume declines as a price trend progresses, there is less reason to believe that the trend will continue. Volume can also be useful for confirming tops and bottoms. A light volume test of a support level suggests a diminution of selling force and is, consequently, bullish. Conversely, a light volume test of a previous high is bearish since it demonstrates a draining of buying power.
Although volume can be a useful auxiliary medium to measure the intensity of a price move, there are some factors with volume, especially as they pertain to futures, that somewhat limit their usefulness. Volume is reported a day late. Spread trading may cause aberrations in volume figures especially on individual contract months. With the increasing dominance of options in many futures markets, volume figures could be skewed because of option arbitrage strategies. Nonetheless, volume analysis can be a useful tool. This chapter examines some ways volume and candlestick charting techniques can be merged.
The first thing you want to do when you look at any chart is to look at price and volume to see demand (i.e., increasing volume with price going up) and supply (i.e., increasing volume with price going down). It could be just strong price moves up or down without volume confirming. Once you understand this simple, visual picture of supply and demand shown on the chart, you will know what to look for in any technical signals that employ either simple or complicated techniques such as third or fourth derivatives.
if you are grounded in the visual picture of supply and demand using volume and price, you will never make a mistake with any other technical signal you use. You will be able to recognize false technical signals that do not correspond to the visual display of supply and demand showing on the chart. You must always see supply and demand in terms of volume and price. Many times you will not have a clear picture of supply and demand because the market does not know where to go next and is not giving any signal. When that happens, you must presume the existing trend is correct until you receive a signal in terms of price and volume to the contrary.