[DbPhoenix]

Originally Posted by cunparis »

I have a question about volume driving price.
...

I just today read this about the SB volume oscillator:

I had thought it was the opposite. That if price goes up on big volume that institutions are buying. But here they are saying the opposite. Could someone elaborate on this?

Thanks!

I suggest you forget about institutions and smart money and dumb money and herds and sheep and lemmings. None of it has anything to do with the price action that's in front of you.

Volume is trading activity. If there's a lot of trading activity, there's a lot of volume. If there's little or no trading activity, there's little or no volume. Therefore, a lot of "volume" means that there is a lot of trading activity. Who is responsible for the volume is irrelevant. Your concern is the balance between supply and demand, or, if you like, selling pressure and buying pressure. If buying pressure is greater, price will rise. If selling pressure is greater, price will fall. That's it. Fretting about whether the volume is "buying volume" or "selling volume" is an unnecessary distraction since the volume is by its nature both, that is, a lot of "selling volume" has to be matched by an equal amount of "buying volume" or else there won't be any "volume" -- trading activity -- at all. You can pay somebody $100/mo to tell you whether the volume is "buying volume" or "selling volume", but if you can tell up from down you can easily determine this for yourself and do something much more interesting with the hundred dollars.

As for bars and candles, these are simply a means of illustrating the price action and I see no reason for people to get snippy about them vs T&S, which is also a means of illustrating price action. In Wyckoff's world, what matters is not how one illustrates the action but the action itself, i.e., the pace and extent and duration of each buying and selling wave. If one has no sense of the continuous ebb and flow of these waves, how he illustrates the price action is of no importance whatsoever.

[Head2k]

Originally Posted by AgeKay »

This is a contradiction. How can almost all of them have already bought when there was heavy supply.
This and the following text of yours actually sounds very similar to the story I criticized earlier. You're trying to explain what might have happened after the fact, but the fact is you don't know (neither do I or anybody else unless you look at the actual time & sales). It's all just speculation unless you look at the actual trades. Candles/bars are just a summary of price movement that condense trade activity into 5 pieces of information: low, high, open, close and volume. Price could have moved up and down within one candle/bar 100 times (which might be the reason that there is a lot of volume), but it would look exactly the same like another candle/bar that went up straight up.
Also don't forget there can only be a lot of volume when there is both a lot of supply and demand, because if there was not a lot of supply then price would just move up on little volume.

Maybe I wasnt clear enough. Of course in the climatic moment there is extreme demand. But supply is able to swamp it. THEN there is only little supply left to continue the upward movement or even to support the price, at least for some time.
In real time you can watch the candle to form, so you have an idea of the dynamics of the movement. Of course that I dont know if this potentially climatic struggle is actually really climatic or only a pause (i.e. there is still more demand left) and I dont know if those who bought near the highs will panic and add to the downward momentum, or they decide to hold... But there is a chance.
Yet I am a newbie and I am in the beginning of learning the market dynamics, so I have no doubt that you have a deeper insight. Maybe really all these rationalizations and stories of interpretation one tries to develop are really irrelevant and one should focus only at the facts (or effects). Still you need to interpret facts to be able to take some action...

[Head2k]

Originally Posted by AgeKay »

I suggest that you learn how price discovery/order matching works to understand what drives price changes.

Could you please advise some resources for this?

[Kiwi]

You have the right attitude Head2k.

Be aware that different markets will:
1. Have good volume effects or none on some or all timescales
2. Have different effects even when they are good.

So you are best (IMO) to start with price. Then look at rising, falling, unusually large or small, volume in the situations where you think price was telling you something. And find out if volume helps or hinders your view.

It helps to have a theory of how volume works but as db says above, don't overly complicate it. Searching for too much certainty is a great thing in an analyst but can be fatal for a trader. I am a sometimes reader of volume, because I have found it to be deceptive in many circumstances. When it gives good info I use it - but the rest of the time I ignore it as so much noise.

[BlowFish]

I definitely think we are ready for a T&S thread. Darth mentioned he had made good progress there. It would have my attention though not sure I could contribute much. Guess I am more of a visual person but hav difficulty with just using the 'tape' (T&S)

[cunparis]

Interesting discussion, thanks to everyone participating for helping me to understand how this works.

From what I read of the Wyckoff theory, the composite man establishes a position in a stock and then drives the price up, finally dumping the shares on the public. The analogy in Pruden's book is to the fashion industry, where clothes are sold (dumped) to the public at discount stores and the public doesn't know it but the clothes are out of fashion, just as the shares are out of gas and can't go up any more.

But as AgeKay points out the institutions are responsible for the majority of the stock volume. So I think, as another poster said, there are smart institutions and dumb institutions. The public can't absorb all the stock.

My original question is because the service I referred to calls a volume increase with price increase "selling volume". From my experience with IBD & O'Neil, when there is a big price move on big volume it means institutions are buying and it's positive. This is usually the criteria for entry using O'Neil's method. But this service is saying that such a thing means price is going down, which has been my experience the majority of the time when trading IBD's buy points!!!

Could it be that both are correct? That the market volume service is saying price will go down (short-term) and IBD is saying price will go up (long term)? That's the only explanation I can make of it.

I find the whole thing a bit confusing. Price goes up 5% on 2x volume. The optimistic person says "there are a lot of people buying". But the pessimist says "There are a lot of people selling". How do we know which side is right?

[BlowFish]

Some of the 'models' bandied about are hugely simplistic and not really representative of whats going on. If you are really interested in who trades (market participants) and why (their objectives) I'd recommend you pick up a book on market mircostructure. I like Harris though hear O'Hara is as good (better?).

You could of course choose to ignore who trades and why and still trade successfully just by knowing that someone is trading (volume).

Half baked ideas (largely spread by marketeers and then re quoted as fundamental truth) about 'who' and 'why' may not hinder your trading but they certainly wont help your understanding of markets. This is fast becoming a pet crusade of mine!

[AgeKay]

I think DBPhoenix and BlowFish are right on. Reread their posts a few times until it sinks in. Don't worry about who does what, but instead focus on what happens in regards to volume and price.

Originally Posted by Head2k »

Could you please advise some resources for this?

These topics are all closely related:

Market Microstructure: "Trading and Exchange: Market Microstructure for Practioners" (2002) by Larry Harris

Price Discovery/order matching: this is basically the process by which the limit order book works / how orders are matched / why prices change. I don't know of a good single resource. I picked up little pieces here and there. Maybe someone else knows a good resource. I recommend just googling those terms. It might also help to just read on the order matching algorithms on the exchanges. Eurex has a good description: http://www.eurexchange.com/trading/m...ciples_en.html