- We define Buying Volume as any
volume that is generated as an index pushes lower;
- We define Selling Volume as any
volume that is produced as an index moves higher.
As a general rule of thumb, larger than average amounts of volume to the
downside (i.e., as the index moves lower) indicate buying pressure whereas
larger than average amounts of volume to the upside (i.e., as the index pushes
higher) indicate selling pressure. Given significant amounts of buying / selling
pressure, an index will typically reverse course and in due course begin to move
higher or lower, whatever the case may be.
Consult our JavaVolume charts to determine whether a particular volume event
has generated buying volume (volume to the downside) or selling volume (volume
to the up-side). We make a wide range of charts and settings available. The most
detailed setting is a 2-hour intraday chart with a 5-minute Volume Moving
Average (VMA).
When a significant volume surge appears, this is an indication that a large
number of shares / contracts are changing hands. Such volume surges reflect a
change in market sentiment and frequently presage at least a short-term price
reversal.
Chart 1:
S&P 500 Selling Buying
Volume Chart.
In the chart above, selling pressure exceeds buying pressure when the red
line crosses above the green line a trend reversal on the index becomes more
likely. The same principle applies in reverse when buying volume exceeds selling
volume (i.e., when the green line crosses over the red line).
There are clear relationships between price (i.e., index levels) and volume.
An index is more likely to change direction when there is an increase in volume,
which ultimately affects price movement. For instance, when selling volume has
been dominating, an index will tend to react with a push lower. A thorough
understanding of price / volume relationships will allow you to trade with more
confidence, and help you achieve greater profits.
A very basic trading system that could be built on this knowledge would be
to buy on buying volume surges and to sell on selling volume surges (in each
case after the volume surges have reached their peaks).
