Page 196 - THE MARKET WHISPERER

192 PART 7 - Indicators: The Trader’s Compass

has no significance. There is some degree of truth in this claim, but those
who hold this view ignore the identity of both buyers and sellers. Since
institutional buyers are usually the smart ones in the market, their opinion
holds greater weight, which makes it harder to claim that the sum total of
all opinions is zero. As a result, it is important to identify volume changes
deriving from the activity of these institutional buyers.

Volume Precedes Price

One of the most well-known clichés concerning volume is that “volume
precedes price.” Why would volume precede a rise in price? Institutional
traders who receive instructions from large clients wishing to buy millions
of a certain company’s shares do not feed a buy order into their platforms
for the entire amount in one go, as that would completely expose the client’s
intentions, jump the price higher, and reduce the bonus the traders receive
for buying cheaply. Traders will therefore be interested in buying cheaply
in order to receive the client’s full remuneration, since the traders’ bonus
increases the lower the net price that they get for their client. Traders will
therefore conceal their intentions, enter and exit the market repeatedly,
each time buying a relatively small quantity. In this way, traders can hide
their intentions, and may succeed in preserving the stock’s low price, but
the scope of purchases as manifested in the volume cannot be hidden.
The volume may therefore reveal that stocks are being collected prior to a
price spike. The same is also true for drops in price. Large sellers, usually
investment funds, receive information prior to it reaching the public and
begin operating in large volumes before the stock has moved.

SMART Buy and sell orders can be hidden, but volume can never be
MONEY hidden. An increase in volume always indicates a reason:
someone knows something that you do not yet know.

Average Volume

It is important to check the average daily volume of trade before entering
a stock, for two reasons:

1. Identifying Relative Increase in Volume
A significantly large intraday volume compared to that of the day before
indicates some special activity involving that stock. We love to locate and
follow up on stocks showing volume increases, especially with a double