ChAPter 6 Volume and Open Interest
a
lthough price is regarded as the best indicator of potential future price behav-
ior, volume and open interest offer additional evidence to corroborate bull-
ish or bearish setups. Volume and open interest can indicate potential underlying
weakness and also function as timing indicators for potential breakouts. Many
novices misread declining volume as a weakness in a consolidation. The relation-
ship between volume with bar range also offers critical insights into the actions of
buyers and sellers, especially when extremely low or high volume is accompanied
by unusually large or narrow bar ranges, respectively. Mastery over the interpreta-
tion of volume and open interest action is of paramount importance to the art and
science of forecasting potential price activity in the markets.6.1 The Mechanics of Volume Action
Dow theory of Volume Confirmation
We learned in Chapter 2 that under the tenets of Dow Theory, volume is expected
to confirm the trend, that is, it should expand in the direction of the preexisting orle a r nIn g O b j eCtI Ve sAfter studying this chapter, you should be able to:■ Understand the significance of volume action and its implications for market action
■ Recognize the early indications of potential trend weakness via volume and open inter-
est divergence
■ Identify bullish and bearish signals on volume and open interest indicators
■ Forecast potential reversals and corrections in the market via volume cycles
■ Set up effective volume filtering for more efficient timing of entries and exits
■ Read volume across successive contract months in the futures markets