by Helmut Schmidhofer
Generally speaking, prices move down due to the selling pressure and up due to buying pressure. If the attendant volume is at or below the average volume, sellers outnumber buyers in a down move and buyers outnumber sellers in an up move.
However, if the volume sharply increases during the move, it becomes prognostic. As a rule, a surge of volume within a trend always results in a trend reversal. Look to other indicators for the timing.
If heavy volume occurs on one side of a congestion area, with considerably less volume on the other side, expect a breakout on the side of lesser volume, followed by a sharp trend. You can be a "coat-tail trader" if you take contrary positions on the side of the larger volume.
Look at it this way - market manipulation is unethical and illegal. If you think that this stops a powerful hedge fund from practising the highly profitable art of manipulation, think again.
Say you had accumulated a large holding and held it for a considerable profit. Now you want to unload. Your resources are big enough to move the market. What's wrong with creating a buy signal that is followed by a large number of chart readers, and unloading to them? And what's wrong with hanging onto the manipulator's coat tails?
To be meaningful, the increase or differential must be 50% to 100% or more of the average. If you train your nose, volume action lets you sniff manipulation from a mile away. Volume action is the principal alert signal watched by the SEC.
Observe these two rules with any trading system - trend lines, moving averages, oscillators, wave theories, whatever - and you will increase your profits and reduce your losses.
Responding correctly to volume action is the secret of the pros and explains why 5% of traders win what 95% of traders lose. Unfortunately, in some markets we don't have access to the volume information.
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