Why Volume Analysis.

When you study a chart of a major market index, such as for example the S&P 500, what you see is merely a historical summary of the various prices the index traded at over a specific period of time. What you don't see are the volume patterns the index displayed - minute-by-minute. But what you don't see could hurt you!

Below, we provide several reasons why we consider volume to be a trader's best friend:

• Volume completes the market picture   trading on price action alone means seeing only part of the overall picture;
  Volume can help diagnose the health of an existing trend;
• Volume can be used to anticipate shifts (reversals) in an index or individual stock. When analyzed correctly, volume patterns provide the key that lets you anticipate a market's reversal points, which allows you to place buy and sell orders close to the actual turning points;
• Volume is the prime indicator that reliably reflects shifts in the balance between supply and demand;
• The technical analysis of volume patterns is a basic - yet essential - element of any market timing approach. For instance, volume provides valuable clues about the intensity of a given price movement (e.g., the strength or weakness of a particular trend);
• Volume is invaluable in reflecting shifts in market sentiment. Being able to anticipate upcoming sentiment shifts gives you an invaluable trading advantage. If you are currently trading without volume as your guide, you will likely not be alerted to changes in sentiment until it is too late to act profitably on this information - this can lead to costly trading mistakes;
• Monitoring a stock's or index's intraday volume patterns can reveal where it is being repeatedly bought, or sold, as the case may be. For instance, a broad-based spike in the volume moving average occurring towards the end of a rally often signals the impending end of that move. If you were previously not aware of such specific volume-price relationships, you will now start to understand why we call volume a trader's best friend;
• Unlike other indicators, volume patterns can be applied with equal relevance to any particular timeframe you may choose to observe and trade. Why is this so? Simply put, volume measures market sentiment. Fortunately for us traders, human nature is the one ever-present constant in the stock market. Never forget that fact. Once you are able to control your own emotions (particularly fear and greed) while trading, the knowledge of volume as a market sentiment indicator will guide you reliably and profitably. Now, you should really start to see why volume is a trader's best friend.