Swing Trading: Volume Perspective

Basic economics dictates the
premise of supply and demand and their ramifications on price. This theory
holds that when demand exceeds supply price will appreciate, and when supply
overshadows demand asset prices will fall. Indeed this holds true when markets
rise and fall as it reflects the urgency of one side of the market to trade as
opposed to the other. Yet every trade has a counter party; a buyer and a
seller. On the face of it, this clearly indicates that demand and supply are
equal, yet that price is rarely static reports to a further dynamic lending
itself to momentum, inertia and urgency.

Markets are able to
fluctuate somewhat freely on light volume as prices are pushed around by one or
two big orders on a quiet trading day. Yet when trading volumes show a
significant increase from the norm, this indicates substantial market interest.
Here, buyers and sellers of varying points of view are increasingly interested
in divesting each other of their respective positions.

While 80% of all trading
activity has been found to be stop loss oriented, this alarming fact points to
the variety of motivations that market participants adopt to investment
decisions. Some are long term some short term; some are taking profits, some
losses. Amid the confusion, one thing can be certain. When trading volume
experiences a sharp increase – a dramatic market shift is imminent as the price
has motivated substantial participants to become involved in decision making.
At the end of a prevailing trend, volume will increase markedly, and so the
market confirms this by participation. Rarely would this occur mid-trend as by
definition a trend needs urgency of either supply or demand to outweigh one the
in order to maintain its course.

Proponents of other indications
such as technical analysis’ support and resistance, momentum’s MACD index, and
mathematics’ Fibonacci numbers will all seek confirmation with an increase in
volume prior to extending a signal. Primarily as the market needs to be
supporting or rejecting a certain price, the absence of volume can hardly
suggest that is the case. Indeed dwindling volumes are more an indication that
the trend has met a natural end and that a retracement is imminent. A
retraction in trading volume indicates that momentum is slowing and will find
much profit taking entering the market, which will itself perpetuate movement
back to true value.

In this sense, volume is
rarely an indicator applied in isolation and is keenly attuned to other
indicators and in particular, momentum. Still volume must be adjudged with
relative comparison as some markets have typical volumes that would astound
others. Volume ought never to be ignored as it indicates the bastion of trading
activity – participation.

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