Introduction to Volume Analysis | Optuma CMT Level 1 Chapter 10

[Music] hey thanks for joining us again we're talking about an introduction to volume analysis Now volume analysis as a topic is new in uh 2021 and so there's a number of chapters that we're talking about most of it's going to be um centered on the confirmation of Trends based on volume and so touch on that a little bit about with patterns with Dow Theory and things like that we're going to go into more detail now with that as well so looking at the learning objectives we want to Define volume um it's fairly straightforward open interest

for futures Define the terms related to volume we've got two pages of terms that you really need to probably print out and make sure you keep a copy of those describe how volume provides information on liquidity and also participation we'll talk about those and then describe how volume adds perspective to price action all right so volume a volume is basically a trade which is a price and a number of shares or contracts being traded you know we we'll talk mainly about this in in terms of shares because that's easier to understand but remember that if

we're talking about Futures it would be number of contracts would be our volume um that type of thing so trades made up of a price and the number of units traded which is obviously the volume volume is a validation of price it's also the measure of liquidity and we'll talk more about liquidity in a moment volume analysis attempts to expose the relationship between price trends and volume now we know from Dow that when we have a a primary Trend we expect volume to rise as that primary trend is establishing it's one of the big ways

that we can determine whether a reaction is a secondary Trend or it's the start of a new primary Trend it's just all based down to volume and what we see volume doing um the price volume relationship can confirm or contradict price action uh so if we don't see volume we see that there's a secondary reaction there's not much volume we get an idea that hey this is just a a reaction and we're going to wait for volume to participate again all right so these are the terms which I was talking about need to make sure

you print these out Market volume that's the standard volume that's the volume that you and I will see at the bottom of a chart usually it relates to the specific market shares futur whatever um that we're looking at at the time um the total volume or exchange volume is all the shares or all the contracts traded on a particular exchange we really don't see that a lot I don't see that in analysis used very often but sometimes you'll hear about that um nevertheless you know these things are really going to be easy for examiners to

ask questions on so make sure you do remember these total trades is the number of actual transactions that happen now remember that for each transaction that transaction could be 100 shares or it could be a th000 shares so the total volume isn't the number of Trades but obviously the total trades is the number of you know transactions that actually occurred tick volume for each one of those transactions how many shares were inside that trade um and so that's going to be your tick volume open interest again only for futures it's the outstanding contracts so when

we have a Futures Contract for um settlement at some point in the future we're going to have a buyer and a seller and they write an agreement together and that is a Futures Contract now of course all of that's handled by the exchanges now and the Clearing Houses but nevertheless there is that agreement between a buyer and a seller um and open interest is what's telling us how many contracts are still to be settled before the expiry so if we get a week out from expiry and we see that there's tens of thousands of contracts

to be settled we know that there's going to be a lot of volume in the next 10 days um so that's where open interest comes in upside volume when we have trade so let's say we take a tick chart we've got a trade at $100 and we got a trade at $100 And1 so the market went up well we can say that the the number of shares that were traded at 101 Cent um it is counted towards upside volume because basically the market went up and this was the volume that led to the market going

up and conversely downside is the same so we've get this measure of upside volume versus downside now if we see that there's a lot more upside volume than downside then we know that there's pressure pushing the price up rather than pushing it down uh and so it can be very important important to look at because sometimes the price maybe it's it's going up you know and then we get one big trade pushing it all down with lots of volume well that tells a different story so it's a way of looking in behind the prices if

you like to see what's actually going on index volume it's like exchange volume and we do see this one a lot more uh there's analysis and there's relative um cap weighted analysis that we can do um and that's all based on taking all the shares that are part of an IND index say the Dow 30 and totaling up the volume for all of those 30 stocks uh and that becomes the index volume for the day dollar volume uh is the actual dollar value of what was traded so taking the volume multiplying it by the trade

price and then adding all of that up we get our dollar volume cap weighted volume so this is used more in uh different calculations so we look at each security and what their cap weight is and we adjust their volume appropriately so so we're getting you know a cap weighted um value there as well don't see that used an awful lot um but obviously the author feels that that's one that you need to remember the float is sometimes called the shares outstanding it's the actual shares which are available to be traded on the exchange um

so again important number average volume is really just a moving average of the um volume so sometimes because when you got volume spiking up and down all of the time it can be really hard to identify Trends in volume so we use an average maybe 10 or 21 day for a month um we use an average of the volume prices so it's a lot easier to see Trend changes in volume uh as we go as well so there are the two pages of notes on that again make sure you print them out really important I

could see a lot of questions on that material volume validating price this is obviously you know a big one again this is really a reoccurring theme as I said when we've got um high volume um accompanying a change in price then we know that there's a lot of confidence it's validated that yeah this price move is significant uh and we would expect it to continue on if we were to have a jump in prices but no corresponding jump in volume well that's just telling us that there's not really a a lot of conviction there's not

many other people looking on the sidelines seeing that jump in price and thinking oh I want to participate I want to jump in as well so there's no consensus in that um uh example low volume at a given price cast doubt on the validity of the price volume dictates the quality that's another way of thinking about it that when there's more volume than that is a high quality price um and so we can give a lot more um store to what that's telling us rather than a price that happens at low volume volume and liquidity

so when we have um stock that we want to sell so a large institution may want to start liquidating out of a large position uh one of the the things that we need to know is is there enough liquidity in that market for me to be able to sell and so that's where we look at volume we look at the average volume and a lot of institutions will actually look at that and say okay based on the average volume we don't want to put in more than 2 to 5% of the volume per day so

it's going to take us six or seven days to unwind out of this position uh and they keep track of all of that uh as part of their internal metrics so they know they know that okay when we get to maybe a distribution phase in the market we better start um lightening our position in this because it's going to take take us a while to get out we can't wait for a um negative death cross on a 250-day moving average we need to act a little bit earlier so the liquidity is important really important volume

tells us that it tells us whether there's enough liquidity for us to be able to sell out of our positions um if the volume was low and we were selling and we're putting a large order in at market then we would see um Supply way outstripped demand and price would plummet and so that's why institution obviously doesn't want to see that happen they want to slowly get out of their position and try and maintain the price as much as possible all right volume and new information when we get new information be it in the Press

be it as part of a company um release or maybe an a change of some sort of fundamental information we're always going to see some action you know even back to the Dow tenants that the price discounts everything you know the price has already facted in all of the news that's out there but what we can also look at is the volume that goes along with that price action so for instance if we have a situation like this uh IBM to hire 400 people by the Year's End well we can see a price change that'll

go along with that but what's the volume is there is there a a um an increase in in volume that says hey this is significant there's more people transacting based on this news story than maybe a different news story so it gives us an idea of how important the market views different types of news um and so you know it's it's always interesting to me because one day we can have a news story which creates a massive spike in the market and then another day we get this a similar news story for a different company

and it doesn't have the same effect so always how that plays out but nevertheless volume is the way that we can really tell again and this again it's reinforcing what we're talking about volume confirming price uh but you know just saying it in in a different way if volume Rises it ACC equates to more emphasis being placed on the information that came to Market uh volume is also a measure that many investors have different opinions so again take this story uh there may be people there that look look at that and say that's terrible they're

going to eat into their profit uh I'm getting out of IBM and then a different person may say hiring 400 people they must have massive contracts they must have a lot of work I'm going to buy IBM so again you've got these different opinions and again part of this can come down to what's your whole time maybe I've held IBM for four or five years and I'm thinking look I got to start unwinding out of this position I see this and say great there's going to be a a lot of people buying IBM right now

I want to liquidate because there's other things I want to invest in so I'm going to sell into that market never assume that one person's right other person's wrong everyone's coming to the market with different reasons of why they're selling why they're buying at any one point in time uh when new information is released volume reveals the flow of the information really how quickly is that um information uh assimilated into price uh so the volume will tell us that because you know if you see a spike of volume a day later then you say well

gee it took a long time for that volume to have an effect on price if you see it immediately then obviously which is more and more what's happening um with the speed of the internet Etc um we do see these things happening a lot lot faster so volume substantiates the importance really that's repeating what we said before it volume Rises it equates to more emphasis being placed on the information all right so you get the idea behind that how important you know information and and different events external events their importance in price you know is

seen But the volume confirms that as well when Traders believe in their investment they Place big trades now this is the example where if I were to say to you I believe that company XY Z is going to go up and you know we should invest F an advisor and I saying go and invest in that company and yet I only put $100 in myself then you know the number of shares I put in is really um a contradiction to what I said to my recommendation so if I really had conviction about what I was

saying I would put in thousands of dollars um and be investing that way so that's how it works on the individual now we're not always going to know that on an individual basis um but for the general Market we do know that volume so if we see volume Rising we do know that there is conviction there and that people are buying now the interesting part to this is obviously if Supply dries up because let's say we all had the same opinion we all thought that XYZ was going to go up and nobody wanted to sell

it well then obviously price is going to Skyrocket because um Supply is completely dried up and there's a lot of demand for it again for those reasons we said before that's unlikely to happen very often volume exposing the truth you know again we talked about institutions and then buying and and the need for liquidity um sorry for selling I should say and the need for liquidity the same thing as when they buy you know they don't want to put in a large order into Market because you know if the average was let's just say 100,000

shares per day I know well let's say million 100 million shares per day and they come in with an order of 50 million well that's going to make a massive impact on price so they won't put a trade in um into market like that rather they will buy at Market so they'll look at the bids and the asks uh that are there and they will just buy up um at the ask depending on um whether it's within the range that they're willing to pay and then they'll also use things like vwap so which is a

volume weighted average price we talk a bit more about that but it's looking at the intraday value and saying where is the the weighted average price and they want to make sure that they're sitting beneath that or around that price because it kind of disguises the fact that there's a big institution moving money if an institution moved money away from vwap then vwap would have a a very pronounced rise or fall um to because of the the volume that they putting into the market so they'll use tools like that uh as well a significant rise

is always going to be an indication that there's an institution participating so you know we looked at in the previous session um on charting I think it was about Facebook and we had a Facebook at 37 million shares which was greater than normal um in in that period well that's really an indication that there's an institution there they they're working uh andov moving in and out and so that tells us that if the price was going up and the shares were going up well there's someone with a lot of conviction sitting behind that um as

well so again always important to be looking at volume volume and velocity so this is now coming back to Charles da and he really interesting you know he had two thoughts that he um put out as part of his tenants in writings uh Etc he believed that high volume indicated a more accurate price again that's reinforcing what we said before that volume confirms price but the other thing he also believed was that um volume can actually lead price and this is a little bit of an opposite you know we always think about okay there's a

price change does volume support that is volume confirming that this is a real legitimate price change but the other way that Dow looked at this was to say if the prices were pretty consistent and then there was a large spike in volume his expectation was that price would then have a pretty significant move following that um and so it's the other way around almost like the Chicken and the Egg type uh example which one comes first price or volume uh but that's really what he's saying so I think that's something to keep in mind that

if you do see a large um move in volume you can expect a large move to follow in a price either up or down you know it's not saying that a large move in volume only means that it goes up it can go down as well all right so that's the introduction to volume analysis um so we're defining volume you know basically on a trade basis um and then into a period basis as well what's the volume for the day uh defining open Interest Who Futures contracts the terms related print those two pages out um

describe how volume provides information on liquidity and participation covering those and then how volume ads perspective so again that that last slide there from Charles da how um we get these different perspectives on price action yes volume can confirm price but there is this um Nuance there where we can have volume leading price as well all right we'll continue on with the next chapter in volume analysis