Trading and Investing Utilizing Volume And Other Realities

By: Sam Gurarenova


Volume shows you where traders are accepting value at a given time. If the market has been trading within a small range after which it breaks above that range on substantial volume, it indicates that the market is accepting value at higher levels. If you were attending a public auction for an artwork which you own and huge numbers of bidders kept offering higher prices for the painting, you'd deduce that the painting hasn't yet found its ultimate selling value. You definitely wouldn't sell your art piece the moment the first group of bidders begins to vigorously bid.

The market works on comparable auction based principles. Daily, we see a public auction for such artworks as the S&P, NASDAQ, bonds, etc. The powerful interplay amongst buyers and sellers establishes value for all markets. It is whenever you see volume increasing on a price move that people recognize that the market is out of balance. It's going to continue to move in its direction until it might attract enough selling or buying interest to develop a new balance.

Often, I will ask a trader that overlooked a breakout move what happened to volume during that time period? Very often the reply will be I don't know. The investor was so busy concentrating on price and so busy being focused on their own reactions to the movement-that the auction-based concept of the breakout was lost.

I'd debate that this is one law of trading: When something significant happens in the market, good traders focus on the market and the meaning of the events. Bad investors focus on themselves and their frustration over missing the events, how they may make up the money they lost, and so on. Amazingly, I've come across investors who miss entire trending days because they were busy convincing themselves that they missed the move on the original breakout.

The difficulty accepting the obvious is the consequence of a necessity to believe something different. It isn't just that the individual is blinded to reality: it's a need to perceive a different reality. Generally where investors fail to act on breakout moves, or even worse, get stepped on by them, there exists a scenario where the trader was actively predicting another kind of market. Once this becomes part of their analysis, it will become their opinion, and their pride gets swept up in it. The phrase investors use is that they become married to their thoughts and opinions.

What I've found is effective is the active creation of what if scenarios in the market which can be mentally rehearsed. When we're range bound, what if we break above the range with expanded volume? Let's say the small and midcap sectors break above their range, even while my market remains range bound? What if we move to the top of the range and volume dries up? Such what if scenarios actively stop the trader from getting swept up in assumptions that develop into opinions that become marriage soulmates. Plan the trade and trade the plan is normal guidance, but great traders always have a Plan B.

Lastly, consider the reverse situation: Investors in a range bound market who convince themselves at each move that a breakout is at hand. Yet again there exists a need to believe, however for a different reason. Too anxious for action, bored by way of the sideways rectangle pattern, wanting a bit of thrills, they cannot accept that the market has found value and is staying there. Low volumes speak as loudly as high ones to those ready to listen. A market that trades just a few hundred contracts per minute is not bringing in other time-frame players and will only be moved back and forth by locals. It is very easy to overtrade these markets by anticipating breakouts rather than waiting for evidence of their occurrence. The identifying manifestation of this challenge is the frequent complaint of investors that this market just won't trade. They are busy battling what the market is doing instead of following the market's lead.

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