What would YOU say is the most powerful and profitable approach to trading?
Many experts believe the answer lies within the myriad of technical indicators and trading systems they sell in their books, software, and educational courses.
Others argue it’s all about fundamental analysis, knowing the reasons behind the market moves.
While still others believe it’s some combination of both.
However, I maintain that one of the most powerful, profitable, and overlooked methods, is that of Volume.
The purpose of this article is to introduce you to the power of volume analysis. And then, in the following article, I will show you how to use it to significantly increase the profitability of your trading.
Imagine for a minute you’re standing in the observation deck above any major stock or commodity exchange throughout the world.
As you look down into the trading pit, what do you see?
It’s certainly a sight to behold, as traders of all shapes and sizes yell and scream at each other, signaling trades with their hands.
For every buyer, there needs to be a seller. And it’s this battle between buyers and sellers for the best price that creates price movement.
And ultimately, it is this ebb and flow of the buying and selling orders that holds the key to the market’s direction.
Simply put, volume is a measure of how many trades have occurred in a given time period.
And Volume Analysis is the application of various technical indicators on that volume data.
In effect, volume is the fuel that drives the market, and the more fuel there is, the greater the momentum.
This revelation is, of course, nothing new as all the great iconic traders from the past: WD Gann, Elliott, Wyckoff, Jesse Livermore and Richard Ney had all come to this realization as well.
Indeed, Charles Dow himself, the founder and creator of the Dow Jones Index understood the importance of volume, but it’s taken other traders over 100 years to understand the importance of this fact.
What that means is that when there is unusually high volume in any given time period, the price tends to continue in the same direction in the near future.
This principle has been shown to apply to all financial instruments and markets, so it applies equally to currencies, commodities, indices, equities and ETF’s.
So, what is it specifically that makes Volume Analysis so powerful?
Primarily, because it can provide you insight into the strength or weakness of a trend.
But even more importantly, it can signal a price movement before it happens!
All of the other “standard” indicators you’ve read about like moving averages, MACD, stochastics, Bollinger bands, RSI, and Elliott waves are lagging indicators.
That means they look good in hindsight, but they will often help you lose money.
However, with volume as your main indicator, you will be have a much easier time knowing the market direction, which of course, will lead to greater profits.
The bottom line is that volume is an extremely powerful trading tool, and there are many ways to use it.
So, let’s consider some of the basic guidelines for using volume in our trading.
As I’ve mentioned previously, volume analysis enables us to determine the relative strength or weakness of a market move.
As traders seeking profits, we are more inclined to want to enter trades on strong moves or stay out on weak moves. Or, we may choose to look for entries in the opposite direction of weak moves.
Of course, these guidelines don’t apply in every situation, but they are valuable as a general aid in making your trading decisions.
When a market is rising, we should see rising volume. That’s because enthusiastic buyers will keep pushing prices higher.
But if prices increase on decreasing volume, this shows a general lack of interest and is an early indicator of a potential price reversal.
Here’s the key point: A price move on weak volume is not a strong trend and entering a trade at this point can be an invitation to a quick loss.
However, a price move on large volume is a strong trend and provides a great trading opportunity.
In my next article, I will illustrate several of the key situations we often face as traders and how you can significantly increase your trading results through the use of Volume Analysis.
Now, you may be wondering how I became such a proponent of using volume analysis in my own trading.
It’s because about a year ago, I had the privilege to spend a significant amount of time trading with Nigel Hawkes, who is the world’s foremost authority in advanced volume strategies.
If you would like to learn more about his approach to volume trading, I highly recommend you review his free training videos:
To your trading success,