Volume = Power = Sentiment
Volume plays an equally important role in price. While most individuals look at volume in terms of how much commitment is behind a price movement, it’s better seen as a gauge for market psychology. Volume provides clues to the emotions of buyers and sellers. Volume and price have a symbiotic relationship, and experienced traders understand how to analyze and interpret them together.
Volume is the best indicator of how emotionally invested individuals are in a move. For instance, high volume may indicate emotional commitment or mania, while low volume may indicate complacency or apathy—or nothing at all. Understanding the movements of the market as they relate to volume can help you significantly.
When you are analyzing volume using chart pattern techniques, volume shouldn’t be used as a timing indicator. Don’t wait to see volume before you buy, or you might miss out on the next move altogether. Except for special applications, such as the NYSE Volume Ratio indicator, volume is a confirming indicator and should be used as such.
Volume comes in various measures. The New York Stock Exchange (NYSE) volume provides one of the more comprehensive views of the markets. NYSE up and down volume data measure market sentiment, which is basically a way to gauge the fear and greed among traders and a power tool in identifying short-term tops and bottoms.
These volume waves of greed and fear allow us to identify peaks and troughs during a sideways trading market. When used in conjunction with trend, cycle and volatility analysis, this secret weapon dramatically improves your market timing while filtering out false tops and bottoms.
This indicator is critical to get a feel for the current sentiment (mindset/emotional level) of the market participants. Remember, we want to know what the herd is thinking. This way, when they are rushing in the door to buy or rushing the exit door to sell, we will be ready to take the other side of their emotionally driven trade.