Many traders focus exclusively on price quotes, but while those are extremely important, there’s more to the market than price. Volume of transactions provides a valuable additional dimension. Joseph Granville, a pioneer of volume studies, was fond of saying “Volume is the steam that makes the choo-choo go.”

Another hugely important factor of market analysis is time. Markets live and move in different timeframes at the same time. No matter how carefully you analyze the daily chart, its trend can be upended by a move that erupts from another timeframe.

In this section we’ll focus on volume and volume-based indicators. We’ll also look into tying all market decisions to their timeframes.


Volume reflects the activity of traders and investors. Each unit of volume represents actions of two individuals: one sells a share or a contract and another buys that share or a contract. Daily volume is the number of shares or contracts traded in one day.

Traders usually plot volume as a histogram—vertical bars whose height reflects each day’s volume. They usually draw it underneath prices. Changes in volume show how bulls and bears react to price swings and provide clues to whether trends are likely to continue or to reverse.

Some traders ignore volume. They think that prices already reflect all information known to the market. They say, “You get paid on price and not on volume.” Professionals, on the other hand, know that analyzing volume can help them understand markets deeper and trade better.

Volume depends on the size of the trading crowd and the activity levels of buyers and sellers. If you compare volumes of two markets, you’ll see which is more active or liquid. You are likely to receive better fills and suffer less slippage in liquid markets than in thin, low-volume markets.

There are three ways to measure volume:

  1. The actual number of shares or contracts traded. For example, the New York Stock Exchange reports volume this way. This is the most objective way of measuring volume.
  2. The number of trades that took place. Some international exchanges report volume this way. This method is less objective because it doesn’t distinguish between a 100-share trade and a 5000-share trade.
  3. Tick volume is the number of price changes during a selected period of time, such as 10 minutes or an hour. It is called tick volume because most changes equal 1 tick. Some exchanges don’t report intraday volume, forcing day traders to use tick volume as a proxy for real volume.

FIGURE  BID daily, 22-day EMA, volume. 

A note to forex traders: since that market is decentralized and reports no volume, you can use the volume of currency futures as its proxy. Futures of all major currencies, measured against the U.S. dollar, are traded in Chicago and on the electronic exchanges. We can assume that their volume trends are reasonably similar to those in the forex markets, since both respond to the same market forces.

Crowd Psychology

Volume reflects the degree of financial and emotional involvement, as well as pain, among market participants. A trade begins with a financial commitment by two persons. The decision to buy or sell may be rational, but the act of buying or selling creates an emotional commitment in most people. Buyers and sellers crave to be right. They scream at the market, pray, or use lucky talismans. The level of volume reflects the degree of emotional involvement among traders.

Each tick takes money away from losers and gives it to winners. When prices rise, longs make money and shorts lose. When prices fall, shorts gain and longs lose. Winners feel happy and elated, while losers feel depressed and angry. Whenever prices move, about half of the traders are hurting. When prices rise, bears are in pain, and when prices fall, bulls suffer. The greater the volume, the more pain in the market.

Traders react to losses like frogs to hot water. If you throw a frog into a hot pail, it’ll jump in response to sudden pain, but if you put a frog into cool water and heat it slowly, you can boil it alive. If a sudden price change hits traders, they jump from pain and liquidate losing positions. On the other hand, losers can be very patient if their losses increase gradually.

You can lose a great deal of money in a sleepy stock or a future, such as corn, where a one-cent move costs only $50 per contract. If corn goes against you just a few cents a day, that pain is easy to tolerate. If you hang on, those pennies can add up to thousands of dollars in losses. Sharp moves, on the other hand, make losing traders cut their losses in a panic. Once weak hands get shaken out, leaving behind a volume spike, the market is ready to reverse. Trends can persist for a long time on moderate volume but can expire after a burst of volume.

Who buys from a trader who is selling his losing long position? It may be a short seller who wants to cover and take profits. It may be a bargain hunter who steps in because prices are “too low.” A bottom-picker takes over the position of a loser who washed out—he either catches the bottom or becomes the next loser.

Who sells to a trader who buys to cover his losing short position? It may be a savvy investor who takes profits on his long position. It also may be a top-picker who sells short because he thinks that prices are “too high.” He assumes the position of a loser who covered his shorts, and only the future will tell whether he is right or wrong.

When shorts give up during a rally, they buy to cover and push the market higher. Prices rise, flush out even more shorts, and the rally feeds on itself. When longs give up during a decline, they sell, pushing the market lower. Falling prices flush out even more longs, and the decline feeds on itself. Losers who give up on their trades propel trends. A trend that moves on steady volume is likely to persist. It shows that new losers are replacing those who washed out.

When volume falls, it shows that the supply of losers is running low and a trend is ready to reverse. It happens after enough losers catch on to how wrong they are. Old losers keep bailing out, but fewer new ones come in. Falling volume is a sign that the trend is about to reverse.

A burst of extremely high volume also gives a signal that a trend is nearing its end. It shows that masses of losers are bailing out. You can probably recall holding a losing trade longer than you should have. Once the pain became intolerable and you got out, the trend reversed and the market went the way you expected, only without you. This happens time and again because most humans react to stress similarly and bail out at roughly the same time. Professionals don’t hang on while the market beats them up. They quickly close out losing trades and reverse or wait on the sidelines, ready to re-enter.

Volume spikes are more likely to signal an imminent reversal of a downtrend than an uptrend. Volume spikes in downtrends reflect explosions of fear. Fear is a powerful but short-term emotion—people run fast, dump shares, and then the trend is likely to reverse. Volume spikes in uptrends are driven by greed, which is a slower-moving, happy emotion. There may be a slight pause in an uptrend after a volume spike, but then the trend is quite likely to resume.

Volume usually stays relatively low in trading ranges because there is relatively little pain. People feel comfortable with small price changes, and flat markets can drag on a long time. A breakout is often marked by a dramatic increase in volume because losers run for the exits. A breakout on low volume shows little emotional commitment to a new trend. It indicates that prices are likely to return into their trading range.

Rising volume during a rally shows that more buyers and short sellers are pouring in. Buyers are eager to buy even if they have to pay up, and shorts are eager to sell to them. Rising volume shows that losers who leave are being replaced by a new crop of losers.

When volume shrinks during a rally, it shows that bulls are becoming less eager, while bears are no longer running for cover. The intelligent bears have left long ago, followed by weak bears who could not take the pain. Falling volume shows that fuel is being removed from the uptrend and it’s ready to reverse.

When volume dries up during a decline, it shows that bears are less eager to sell short, while bulls are no longer running for the exits. The intelligent bulls have sold long ago, and the weak bulls have been shaken out. Falling volume shows that the remaining bulls have greater pain tolerance. Perhaps they have deeper pockets or bought later in the decline, or both. Falling volume identifies an area in which a downtrend is likely to reverse.

This reasoning applies to all timeframes. As a rule of thumb, if today’s volume is higher than yesterday’s, then today’s trend is likely to continue.

Trading Pointers

The terms “high volume” and “low volume” are relative. What’s low for Amazon may be very high for a less popular stock, while what’s low for gold is high for platinum,  and so on. We compare volumes of different stocks, futures, or options only when selecting higher-volume trading vehicles. Most of the time, we compare current trading volume of a stock to its average volume. As a rule of thumb, “high volume” for any given market is at least 25 percent above its average for the past two weeks, while “low volume” is at least 25 percent below average.
  1. High volume confirms trends. If prices rise to a new peak and volume reaches a new high, then prices are likely to retest or exceed that peak.
  2. If the market falls to a new low and the volume reaches a new high, that bottom is likely to be retested or exceeded. A very high volume “climax bottom” is almost always retested on low volume, offering an excellent buying opportunity.
  3. If volume shrinks while a trend continues, that trend is ripe for a reversal. When a market rises to a new peak on lower volume than its previous peak, look to take profits on a long position and/or for a shorting opportunity. This technique does not work as well in downtrends because a decline can persist on low volume. There is a saying on Wall Street: “It takes buying to put prices up, but they can fall of their own weight.”
  4. Watch volume during reactions against the trend. When an uptrend is punctuated by a decline, volume often picks up in a flurry of profit taking. When that dip continues but volume shrinks, it shows that bulls are no longer running or that selling pressure is spent. When volume dries up, it shows that the reaction is nearing its end and the uptrend is ready to resume. This identifies a good buying opportunity. Major downtrends are often punctuated by rallies that begin on heavy volume. Once weak bears have been flushed out, volume shrinks and gives a signal to sell short.

Volume-Based Indicators

Several indicators help clarify volume’s trading signals. For example, a 5-day EMA of volume can identify volume’s trends. A rising EMA of volume affirms the current price trend, while a declining one points to the price trend’s weakness.

This and other volume-based indicators provide more precise timing signals than volume bars. They include On-Balance Volume and Accumulation/Distribution, described below. Force Index combines price and volume data to help identify areas where prices are likely to reverse.

On-Balance Volume

On-Balance Volume (OBV) is an indicator designed by Joseph Granville and described in his book, New Strategy of Daily Stock Market Timing. Granville used OBV as a leading indicator of the stock market, but other analysts applied it to futures.

OBV is a running total of volume. Each day’s volume is added or subtracted, depending on whether prices close higher or lower than on the previous day. When a stock closes higher, it shows that bulls won the day’s battle; that day’s volume is added to OBV. When a stock closes lower, it shows that bears won the day, and that day’s volume is subtracted from OBV. If prices close unchanged, OBV stays unchanged. On-Balance Volume often rises or falls before prices, acting as a leading indicator.

Crowd Psychology

Prices represent the consensus of value, but volume represents the emotions of market participants. It reflects the intensity of traders’ financial and emotional commitments, as well as pain among losers, which is what OBV helps to track.

A new high of OBV shows that bulls are powerful, bears are hurting, and prices are likely to rise. A new low of OBV shows that bears are powerful, bulls are hurting, and prices are likely to fall. When the pattern of OBV deviates from the pattern of prices, it shows that mass emotions aren’t in gear with mass consensus. A crowd is more likely to follow its gut than its mind, and that’s why changes in volume often precede price changes.

Trading Signals

The patterns of OBV tops and bottoms are much more important than the absolute levels, which depend on the starting date of your calculations. It is safer to trade in the direction of a trend that is confirmed by OBV.
  1. When OBV reaches a new high, it confirms the power of bulls, indicates that prices are likely to continue to rise, and gives a buy signal. When OBV falls below its previous low, it confirms the power of bears, calls for lower prices ahead, and gives a signal to sell short.
  2. OBV gives its strongest buy and sell signals when it diverges from prices. If prices rally, sell off, and then rise to a new high, but OBV rallies to a lower high, it creates a bearish divergence and gives a sell signal. If prices decline, rebound, and then fall to a new low, but OBV falls to a more shallow bottom, it traces a bullish divergence and gives a buy signal. Long-term divergences are more important than the short-term ones. Divergences that develop over the course of several weeks give stronger signals than those created over a few days.
  3. When prices are in a trading range and OBV breaks out to a new high, it gives a buy signal. When prices are in a trading range and OBV breaks down and falls to a new low, it gives a signal to sell short.

More on OBV

One of the reasons for Granville’s success in stock market timing was that he combined OBV with two other indicators—the Net Field Trend indicator and the Climax indicator. Granville calculated OBV for each stock in the Dow Jones Industrial Average and rated its OBV pattern as rising, falling, or neutral. He called that a Net Field Trend of a stock: It could be +1, −1, or 0. Climax indicator was a sum of the Net Field Trends of all 30 Dow stocks.

FIGURE  MCD daily, 22-day EMA, On-Balance volume (OBV). 

When the stock market rallied and the Climax indicator reached a new high, it confirmed strength and gave a buy signal. If the stock market rallied but the Climax indicator made a lower top, it gave a sell signal.

You can look at the Dow Jones Industrial Average as a team of 30 horses pulling the market wagon. The Climax indicator shows how many horses are pulling uphill, downhill, or standing still. If 24 out of 30 horses pull up, 1 down and 5 are resting, then the market wagon is likely to move up. If 9 horses pull up, 7 pull down, and 14 are resting, that wagon may soon roll downhill.

Remarkably, Granville did his calculations by hand1 . Now, of course, OBV, the Net Field Trend indicator, and the Climax indicator can be easily programmed. It would be worthwhile to apply them to a database that includes all stocks of the S&P 500 index. This method may produce good signals for trading the S&P 500 futures and options.


This indicator was developed by Larry Williams and described in his 1973 book, How I Made One Million Dollars. It was designed as a leading indicator for stocks, but several analysts applied it to futures. The unique feature of Accumulation/Distribution (A/D) is that it tracks the relationship between opening and closing prices, in addition to volume. Its concept is similar to that of Japanese candlesticks, which at the time Williams wrote his book weren’t known to Western traders.

Accumulation/Distribution is more finely calibrated than OBV because it credits bulls or bears with only a fraction of each day’s volume, proportionate to the degree of their win for the day.

If prices close higher than they opened, then bulls won the day, and A/D is positive. If prices close lower than they opened, then the bears won, and A/D is negative. If prices close where they opened, then nobody won, and A/D is zero. A running total of each day’s A/D creates a cumulative A/D indicator.

For example, if today’s high-low spread was five points but the distance from the open to the close was two points, then only 2/5 of today’s volume is credited to the winning camp. Just as with OBV, the pattern of A/D highs and lows is important, while its absolute level simply depends on the starting date.

When the market rises, most people focus on new highs, but if prices open higher and close lower, then A/D, which tracks their relationship, turns down. It warns that the uptrend is weaker than it appears. If, on the other hand, A/D ticks up while prices are down, it shows that bulls are gaining strength.

Crowd Behavior

Opening prices reflect pressures that have built up while the market was closed. Openings tend to be dominated by amateurs who read their news in the evening and trade in the morning.

Professional traders are active throughout the day. They often trade against the amateurs. As the day goes on, waves of buying and selling by amateurs as well as slow-moving institutions gradually subside. Professionals tend to dominate the markets at closing time. Closing prices are especially important because the settlement of trading accounts depends on them.

A/D tracks the outcomes of daily battles between amateurs and professionals. It ticks up when prices close higher than they opened—when professionals are more bullish than amateurs. It ticks down when prices close lower than they opened— when professionals are more bearish than amateurs. It pays to bet with the professionals and against the amateurs.

Trading Rules

When the market opens low and closes high, it moves from weakness to strength. That’s when A/D rises and signals that market professionals are more bullish than amateurs, and the upmove is likely to continue. When A/D falls, it shows that market professionals are more bearish than amateurs. When the market weakens during the day, it’s likely to reach a lower low in the days to come.

The best trading signals are given by divergences between A/D and prices.
  1. If prices rally to a new high but A/D reaches a lower peak, it gives a signal to sell short. This bearish divergence shows that market professionals are selling into the rally.
  2. A bullish divergence occurs when prices fall to a new low but A/D bottoms out at a higher low than during its previous decline. It shows that market professionals are using the decline for buying, and a rally is coming.

FIGURE GOOG daily, Accumulation/Distribution Index.

More on Accumulation/Distribution

When you go long or short, following a divergence between A/D and price, remember that even market professionals can go wrong. Use stops and protect yourself by following the Hound of the Baskervilles rule.

There are important parallels between A/D and Japanese candlestick charts, since both focus on the differences between opening and closing prices. A/D goes further than candlesticks by taking volume into account.

Force Index

Force Index is an oscillator developed by this author. It combines volume with prices to discover the force of bulls or bears behind every rally or decline. Force Index can be applied to any price bar for which we have volume data: weekly, daily, or intraday. It brings together three essential pieces of information—the direction of price change, its extent, and the volume during that change. It provides a practical way of using volume for making trading decisions.2

Force Index can be used in its raw form, but its signals stand out much more clearly if we smooth it with a moving average. Using a short EMA of Force Index helps pinpoint entry and exit points. Using a longer EMA helps confirm trends and recognize important reversals.

How to Construct Force Index

The force of every move is defined by three factors: direction, distance, and volume.
  1. If prices close higher than the close of the previous bar, the force is positive. If prices close lower than the close of the previous bar, the force is negative.
  2. The greater the change in price, the greater the force.
  3. The bigger the volume, the greater the force.

                               Force Index = Volumetoday • (Closetoday − Closeyesterday)

A raw Force Index can be plotted as a histogram, with a horizontal centerline at a zero level. If the market closes higher, Force Index is positive and rises above the centerline. If the market closes lower, Force Index is negative and extends below the centerline. If the market closes unchanged, Force Index is zero.

The histogram of a raw Force Index is very jagged. This indicator gives much better trading signals after being smoothed with a moving average.

A 2-day EMA of Force Index provides a minimal degree of smoothing. It is useful for finding entry points into the markets. It pays to buy when the 2-day EMA is negative and sell when it’s positive, as long as you trade in the direction of the trend.

A 13-day EMA of Force Index tracks longer-term changes in the force of bulls and bears. When the 13-day EMA crosses above the centerline, it shows that bulls are in control and suggests trading from the long side. When the 13-day EMA turns negative, it shows that bears are in control and suggests trading from the short side. Divergences between a 13-day EMA of Force Index and prices identify important turning points.

Trading Psychology

When the market closes higher, it shows that bulls won the day’s battle, and when it closes lower, it shows that bears carried the day. The distance between today’s and yesterday’s closing prices reflects the margin of victory by bulls or bears. The greater this distance, the larger the victory achieved.

Volume reflects the degree of emotional commitment by market participants. High-volume rallies and declines have more inertia and are more likely to continue. Prices moving at high volume are like an avalanche that gathers speed as it rolls. Low volume, on the other hand, shows that the supply of losers is thin, and a trend is probably nearing an end.

Prices reflect what market participants think, while volume reflects the strength of their feelings. Force Index combines price and volume—it shows whether the head and the heart of the market are in gear with each other.

When Force Index rallies to a new high, it shows that the force of bulls is high and the uptrend is likely to continue. When Force Index falls to a new low, it shows that the force of bears is intense and the downtrend is likely to persist. If the change in prices is not confirmed by volume, Force Index flattens and warns that a trend is about to reverse. It also flattens and warns of a nearing reversal if high volume generates only a small price move.

Trading Rules

Short-Term Force Index

A 2-day EMA of Force Index is a highly sensitive indicator of the short-term force of bulls and bears. When it swings above its centerline, it shows that bulls are stronger, and when it falls below the centerline, it shows that bears are stronger.

Since the 2-day EMA of Force Index is a sensitive tool, we can use it to fine-tune signals of other indicators. When a trend-following indicator identifies an uptrend, the declines of the 2-day EMA of Force Index below zero pinpoint the best buying points: buying pullbacks during a long-term rally. When a trend following tool identifies a downtrend, rallies of a 2-day EMA of Force Index mark the best shorting areas.

1. Buy when a 2-day EMA of Force Index turns negative during uptrends. Even a fast and furious uptrend has occasional pullbacks. If you delay buying until the 2-day EMA of Force Index turns negative, you’ll buy closer to a short-term bottom. Most people chase rallies and then get hit by drawdowns they find hard to tolerate. Force Index helps find buying opportunities with lower risks.

When a 2-day EMA of Force Index turns negative during an uptrend, place a buy order above the high price of that day. When the uptrend resumes and prices rally, you’ll be stopped in on the long side. If prices continue to decline, your weekly trend is up weekly trend is up weekly trend is up order will not be executed. Keep lowering your buy order to near the high of the latest bar. Once your buy stop is triggered, place a protective stop below the latest minor low. This tight stop is seldom touched in a strong uptrend, but it’ll get you out early if the trend is weak.

FIGURE  ADBE daily, 26-day EMA, 2-day Force Index.

2. Sell short when a 2-day EMA of Force Index turns positive in a downtrend. When trend-following indicators identify a downtrend, wait until the 2-day EMA of Force Index turns positive. It reflects a quick splash of bullishness—a shorting opportunity. Place an order to sell short below the low of the latest price bar.

If the 2-day EMA of Force Index continues to rally after you place your sell order, raise your order the next day to near the previous bar’s low. Once prices slide and you enter a short trade, place a protective stop above the latest minor peak. Move your stop down to a break-even level as early as possible.

Additionally, a 2-day EMA of Force Index helps decide when to pyramid positions. You can add to longs in uptrends each time Force Index turns negative; you can add to shorts in downtrends whenever Force Index turns positive.

Force Index even provides a glimpse into the future. When a 2-day EMA of Force Index falls to its lowest low in a month, it shows that bears are strong and prices are likely to fall even lower. When a 2-day EMA of Force Index rallies to its highest level in a month, it shows that bulls are strong and prices are likely to rise even higher.

A 2-day EMA of Force Index helps decide when to close out a position. It does it by identifying short-term splashes of mass bullishness or bearishness. A short-term trader who bought when this indicator was negative can sell when it turns positive. A short-term trader who went short when this indicator was positive can cover when it turns negative. A longer-term trader should get out of his position only if a trend changes (as identified by the slope of a 13-day EMA of price) or if there is a divergence between the 2-day EMA of Force Index and the trend.

3. Bullish divergences between the 2-day EMA of Force Index and price give strong buy signals. A bullish divergence occurs when prices fall to a new low while Force Index makes a more shallow low.

4. Bearish divergences between the 2-day EMA of Force Index and price give strong sell signals. A bearish divergence occurs when prices rally to a new high while Force Index traces a lower second top.

5. Whenever the 2-day EMA of Force Index spikes down to five times or more its usual depth and then recoils from that low, expect prices to rally in the coming days.

Markets fluctuate between overbought and oversold, and when they recoil from a down spike, we can expect a rally. Note that this signal doesn’t work well in uptrends—markets recoil from down spikes but not from up spikes. Spikes that point down reflect intense fear, which doesn’t persist for very long. Spikes that point up reflect excessive enthusiasm and greed, which can persist for quite a long time.

A 2-day EMA of Force Index fits well into the Triple Screen trading system. Its ability to find short-term buying and selling points is especially useful when you combine Force Index with a longer-term trend-following indicator.

Intermediate-Term Force Index

A 13-day EMA of Force Index identifies longer-term changes in the balance of power between bulls and bears. When it rises above zero, the bulls are stronger, and when it falls below zero, the bears are in charge. Its divergences from prices identify intermediate and even major turning points. Its spikes, especially near the bottoms, mark approaching trend reversals.

FIGURE  SSYS daily, 26-day EMA, 13-day Forex Index

The raw Force Index identifies the winning team in the battle between bulls and bears in any price bar, be it weekly, daily, or intraday. We get much clearer signals by smoothing the raw Force Index with a moving average.

1. When a 13-day EMA of Force Index is above the centerline, bulls are in control of the market. When it is below the centerline, bears are in charge.

When a rally begins, prices often jump on heavy volume. When a 13-day EMA of Force Index reaches a new high, it confirms the uptrend. As an uptrend grows older, prices tend to rise more slowly, and volume becomes thinner. That’s when a 13-day EMA of Force Index starts tracing lower tops. When it drops below its zero line, it signals that the back of the bull has been broken.

2. A new peak of the 13-day EMA of Force Index shows that bulls are very strong and a rally is likely to continue. A bearish divergence between a 13-day EMA of Force Index and price gives a strong signal to sell short. If prices reach a new high but this indicator traces a lower peak, it warns that bulls are losing power and bears are ready to take control.

Note that for a divergence to be legitimate, this indicator must make a new peak, then fall below its zero line, and then rise above that line again, but tracing a lower peak, which creates a divergence. If there is no crossover, then there is no legitimate divergence.

3. A new low in the 13-day EMA of Force Index shows that a downtrend is likely to continue. If prices fall to a new low but this indicator rallies above zero and then falls again, but to a more shallow low, it completes a bullish divergence. It reveals that bears are losing power and gives a buy signal.

When a downtrend begins, prices usually drop on heavy volume. When a 13-day EMA of Force Index falls to a new low, it confirms the decline. As the downtrend grows old, prices fall more slowly or volume dries up—that’s when a reversal is in the cards.

Adding an envelope to the chart of Force Index can help you detect its extreme deviations from the norm, which tend to lead to price trend reversals. This method for catching deviations and potential reversals works well with weekly charts, but not with the daily and intraday charts. This is truly a longer-term tool.


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