Volume and Open Interest
most information about potential price action in the markets. Rising and declin-
ing volume provide useful information about the level of interest or participation
at various prices and indicate whether an ongoing trend is bearish or bullish. In
contrast, historical or significant volume peaks and troughs (i.e., volume overex-
tensions) provide a future reference level for signaling potential tops or bottoms
in the market.
It should also be noted that a change in volume is not an absolute requirement
for a trend to develop or unfold. A trend can persist over prolonged periods on
flat volume. The other interesting characteristic about studying relative levels in
volume is that of bull versus bear market volume. Bull market volume tends to
outweigh bear market volume for a variety of reasons, a few being:■ (^) Many investors prefer to hold on to losing positions in a falling market in the
hope that the positions will eventually rebound to breakeven or profitability.
These participants are displaying what is called loss aversion bias. Many in-
vestors believe that unrealized losses are not real losses and so are willing to
hold on to losing positions. This willingness to hold on does not contribute to
the overall trading activity in a bear market.
■ (^) Investors and traders have the ability to use house money or profit to further
fund new positions in a rising bull market.
■ (^) More investment funds start to market their services in a bull market, attract-
ing more potential investors to participate in the market
Absolute volume is useful for identifying potential price rejection levels based
on significant or historical prices. It is also useful when comparing the amount
of participation across different stocks, sectors, industries, or commodities in
the search for greater liquidity especially when trying to gauge the total volume
turnover with respect to the total number of outstanding shares in a stock. This
will provide information about the absolute level of participation in a stock.
fIgure 6.23 Channels Based on Tick Volume Filtered Inflection on the Daily Chart
of Silver.
Source: MetaTrader 4