To understand the role of the volume is to gain the ability to see closely the war being waged in the market. It is the difference between being there and being there to win. From time to time, you’ll get some slap in the face from the market (it’s impossible to avoid it altogether), but, if you understand the volume, you’ll know exactly who gave it to you and how you could have prevented it.
Attention! Volume is not an indicator
Volume is known as the fifth piece of data. The other four data are the key prices for each period. Namely: opening, closing, maximum and minimum. By this I mean that volume is not an addition. It is an essential part of the market, in its definition.
To know how the market is now, although the price gives us an excellent idea, we have the complete information when we include the volume in the answer.
Let’s be clear: Volume is not an indicator.
Volume is the number of shares or contracts traded in a given period. Please note that for every purchase there is a sale. In other words, the volume is a sales counter.
The basic idea of the volume
Volume measures the level of activity in a market (understanding “market” as the participation in the specific asset we are talking about, whatever it is).
Therefore, a high volume represents a lot of activity, which is associated with a lot of interest in the security in question:
- High volume, a lot of attention.
- Low volume, little interest.
But the absolute volume (the number) is usually irrelevant. After all, giant companies with much more populous (liquid) markets will always have more volume than markets with less participation. Therefore, volume as a number does not matter much. What interests you is the relative volume of a candle to that of its neighbors.
The Key to Understanding Volume: Knowing the Market Agents
To take advantage of the clues that volume gives us (which are innumerable) you have to understand the fauna and flora of the market (of all markets).
If we don’t know who participates and how we have nothing to scratch. I’m not going to go into detail on this topic now, because I could spend a week writing just this section of this article. I will try to summarize:
There are two main players:
- The little fish
Sharks are those participants whose trading accounts are in the order of millions of dollars (or euros). Normally tens, hundreds, even billions. We are all little fishes, and our accounts move in the order of magnitude of thousands of euros; rarely in the realm of millions of euros.
Who buys and who sells
Now that you’re clear about what the game is about (not falling into the mental tricks of the shark and taking advantage of its effect on the misguided little fish), I can better explain how this works:
The key is to understand what the shark is doing. With a double intention:
- So as not to ever be against it.
- To take advantage of the destruction it causes in the minds of the little fish.
Therefore, when judging the sales (and their volume), we put ourselves on the skin of the shark.
In this way, we will know what he is doing, and we get to know what we should and should not do.
Therefore, from now on, what interests us is whether the shark is buying or selling. And, from this point of view, we could speak of volume buyer or volume seller. But please don’t forget that we are getting into the role of the shark in this particular case. Remember that volume is always “buy-sell.”
Playing the low volume
The explosive volume is very showy and helpful to see the shark coming, but the volume that brings you money is the silent volume.
What does a low volume mean?
Do you think it means that the shark is not there? No, it says that the shark is there, watching. And a shark that looks at you is much more dangerous than a shark that moves.
If you remember, at the beginning of this article, I explained that the volume reflects the interest. We can, if you want, assimilate it into the spirit, the strength or the desire that has a price to advance.
Relative, this is relative.
Again, remember that we care about volume behavior in sister situations, not among distant relatives.
We value volume in its local behavior. The number does not matter to us, and we care about the relative height of a volume histogram bar relative to others. This, at the time of evaluating the small volume, is even more certain than with the climactic volume.