Last evening, I presented some introductory thoughts about how I approach the the Price by Volume profiles that I have been using to find “volume voids” in stocks. Let’s take a moment and explore the consequence of a reduced volume area (and it is an area, because it can be measured in 2 dimensions, in this case time and price).
I have long thought that the volume of shares traded in a stock has to be of some significance, but over time, I have found there to be little value to the traditional cumulative volume bar. We hear all the time about “low volume rallies”, “high volume breakouts”, etc…but, especially on shorter-term time frames (daily and under) I find that there is little discernible or tradable information that can be gleaned from them.
On a weekly and monthly chart you can start to see signs of accumulation or distribution, but even (for me at least) that information is dubious.
Basically, ‘traditional’ volume analysis doesn’t provide me with any sort of tradable “edge”…great, so there was heightened interest in the stock on a particular day, hour, minute, whatever. I have found that information to be essentially worthless…to the point where I didn’t pay attention to volume (unless I was looking for a very particular pattern that coincided with volume “drying up”) for a number of years.
Nevertheless, I knew that there had to be value in keeping a record of volume, but I using time as the dependent variable is (to me) not the answer.
I have always thought that the quantity of shares being bought and sold had to hold some sort of significance. Since I have started using the Price by Volume indicator, I have found this to be a much more effective means for analyzing volume. Instead of placing significance on the time variable (i.e., traditional volume analysis), Price by Volume analysis places the emphasis on the PRICE at which shares are being bought and sold. It seems to me that this information holds much more weight than simply saying stock ABC traded at 2.5x normal daily volume.
For example, you can look at a ten year record of a stock and see that significantly more shares were traded between, say 15 and 20 than there were between 20 and 30.
What this means to me is that the region between 15 and 20 suggests a pricing equilibrium. For the most part, in the time frame selected (longer is always better, IMO, with Price by Volume analysis) buyers and sellers agree that this is a “fair value” for the stock (though not necessarily from a traditional valuation perspective).
When price moves into the volume “void” there is no consensus on the value of the stock…historically speaking, people didn’t buy in this region and they also didn’t sell in this region. So, theoretically, there will be a limited resistance (or support, but I’m not as confident in this analysis as a shorting tool) to keep the a stock from advancing. There is indecision, there is limited supply and heightened demand.
I’m going to delve into this in greater detail in a future post, but where this could really interesting is with stocks that are making all-time highs.
My day is about to come to an end, so I need to wrap this up.
Lastly, let me say that I am by no means an expert on this topic and, in fact, am just beginning to really delve into this…so if you have thoughts/experiences/whatever in regard to Price by Volume analysis, please feel free to share them in the comments section so that we can try to continue the learning process.
My best to you all.
7 Responses to Continued Price By Volume Commentary
Interesting ideas… Thanks for sharing.
Thanks for reading.
Let me know if you have any questions…I’m kind of exploring my thoughts on the fly with this and certainly welcome additional viewpoints.
I took volume off my watch list a long time ago.
Between the dark pools, off exchange trading, and HFTs making up some 70% of the intra day trading the volume issue is meaningless.
Once in awhile I will check the volume on a gap down or up just to see if there may be capitulation.
Price by volume sounds intersting but I like to keep it simple with a minimum number of indicators. If you have an hour or so and want to get depressed about short term trading you might want to read this academic study regarding HFT’s profits and where they come from.
After analyzing my best trades from 2012, they all had one thing in common: longer-term analysis and bias. Almost all of the short term trades I took ended up blowing up in my face (which was exacerbated by the use of options), so for 2013 I’m only taking trades based on information I gather from longer-term charts (weeklies). Sure, this might not make for an exciting read (no speed chopping carrots here), but it’s much more effective for me.
To address your minimalist concerns, Price by Volume is currently the only indicator that I am using…or the only one I’m paying attention to at least.
Thanks for reading and commenting.
Composite Volume Profile is used extensively by many ES_F traders. The volume pocket, or “void” that you described is the LVN, or areas where market participants do very little business. The stock will either shoot right thru (like a Venturi tube), or immediately reverse. Thus, it can act as a natural support/resistance level. HVN’s, or high volume nodes, are areas where many participants do business, so stocks tend to be in balance in those areas. If you have any time, check out “Markets in Profile” by James Dalton
Okay, thanks for your input.
Since I’m identifying these “LVN’s” on weekly charts (spanning nearly 10 years), the “Venturi effect” that you describe (side note: as a Civil Engineering grad, and someone who enjoyed [basic] fluid dynamics, I appreciate the reference) should it take place will occur over a much larger time frame, thus allowing the common pleb a chance to jump on for the ride, no? i.e., I imagine it’s tougher to do this on the ES_F due to the presence of HFT and the smaller time frame.
I have many more thoughts on how to “play” this phenomenon using a percentage ‘buffer’ on the bottom and top of the LVN. I’m going to delve into this in much greater detail soon.
Thanks again for your commentary.
I haven’t seen anyone try apply these concepts to daily/weekly charts, so you would be a pioneer in this regard! Watching with interest…..