Volume is always a two-sided matter. There is always a buyer and a seller. When the volume equals one, it means that one seller sold one share to one buyer. If the volume equals one million, it means that a group of sellers have sold one million shares to another group of buyers. By itself, volume does not show whether traders are selling or buying, nor does it show whether there more buyers or sellers. The Volume shows the number of shares transferred from sellers to buyers.
If the price declines, it means that sellers are willing to sell at a cheaper price than the “ask price” and that there are not enough buyers to satisfy the demand of these sellers. If the price moves up, it means that the buyers are ready to pay a higher price than the “bid price” and that there are not enough sellers to satisfy their demand.
There are four major factors that can be obtained from volume analysis:
Money Flow - Money Flow allows one to see whether the money is coming in or going out. Changes in the money flow allow one to spot changes in the trend.
Accumulation - Volume allows one to see how strongly a stock, index or market is overbought or oversold by measuring the intensity of trading during the price advance or price decline. The more volume accumulated during a trend, the stronger the reversal that can be expected.
Volume Surges and Volume Spikes - Volume allows one to spot periods of panic selling and greedy buying that are revealed through big volume surges and volume spikes. As was mentioned above, volume is always a two-sided matter. For each buyer, there is a seller and a volume surge means that a group of traders have decided to satisfy the demand of other traders.
A volume surge during a price decline revels that a group of institutional traders (who have a great deal of money) have became attracted by the low bargain price at that moment and decided to buy in large quantities from the group of panic traders who were pushing the price down. Alternatively, a volume surge during a price advance reveals that the institutional traders have decided to sell in large quantities to greedy buyers. As a rule, big volume surges lead to a shift in the supply/demand balance, followed by a trend reversal.
Liquidity – the volume allows one to see how liquid a stock or any other security is. The higher the average volume is, the more liquid the stock is and, also, the easier it is to sell or buy this stock. Such stocks as QQQQ and SPY are among the most liquid stocks in the world - they have the highest average daily trading volumes.
Most of the volume-based technical indicators are leading indicators - indicators that predict trend reversals.
Buying-Selling Volume and the indicators
Buying and Selling Volume: Total volume is made up of buying volume and selling volume. Buying volume is the number of contracts that were associated with buying trades, and selling volume is the number of contracts that were associated with selling trades. However, this is often confusing for new traders because every trade requires both a buyer (a trader that is buying a contract) and a seller (a trader that is selling a contract). As every trade requires that a contract is being both bought and sold at the same time, it does not seem possible that a trade could be classified as either buying volume or selling volume.
Bid and Ask Volume: The reason that it is possible to classify a trade as either buying volume or selling volume is based upon how the trade affects the current price. Every trade occurs at a single price, and with few exceptions, that price is either the bid price or the ask price. Volume that occurs at the bid price is known as bid volume. Bid volume is selling volume because it has the potential to move the price down, due to the bid price being lower than the ask price. Conversely, volume that occurs at the ask price is known as ask volume. Ask volume is buying volume because it has the potential to move the price up, due to the ask price being higher than the bid price. Therefore, trades that occur at the bid price are considered selling volume because they help the price move down, and trades that occur at the ask price are considered buying volume because they help the price move up.
SBV (Selling-Buying Volume) indicator helps you to define critical levels at which a trend reversal is most likely to occur. During a specified period, the SBV indicator calculates the difference between the volume production during a price (index) advance (“Buying volume”) and the volume that is generated as the price (index) moves lower (“Selling volume”).
The SBV indicator reflects the magnitude and duration of “Selling surges” (which occur as the price / index moves down) and “Buying surges” (which are created as the price / index moves up). For instance, when the SBV indicator hits levels exceeding +33%, it reveals that the Buying volume has exceeded the Selling volume by more than 33% (the SBV indicator will be green). The opposite is true when the SBV indicator drops below a level of -33% (in this case, the SBV indicator will be red). In this particular example, the Selling volume would exceed the Buying volume by more than 33%.
A very simple trading system can be built using the SBV indicator: Sell on Buying surges and buy on Selling surges.