Summary: In “Investing with Volume Analysis,” Buff Pelz Dormeier emphasizes the importance of volume in evaluating market trends. He introduces the Volume Price Confirmation Indicator (VPCI) to help investors assess the strength of price movements. The book highlights how understanding volume can lead to better trading decisions and long-term success.
A technical analyst studies four major areas: sentiment, cycles,
price, and volume. Sentiment indicators monitor market participants. Insiders, specialists, and institutions generally are regarded as having superior or leading opinions, whereas advisory services, journalists, and small traders usually are seen as having stale news or inferior opinions. Cycle analysis is the study of time—the order, length, and recurrences of market trends. The preponderance of technical analysis involves price and chart analysis. The price chart represents the actions and behavioral patterns of investors—the market’s testimony. Price testifies to what investors believe and how strongly they believe it. However, if price is the market’s testimony, volume is the market’s polygraph. (View Highlight)
In this way, volume substantiates price by measuring the force and extent of investor convictions. (View Highlight)
When volume increases, it confirms price movements; when volume decreases, it contradicts price movements. (View Highlight)
However, in the exchange markets, price originates from two separate parties agreeing to disagree. If I am buyer of a stock, it takes a second party willing to sell the same stock to commence the exchange. So what is this second party’s opinion of the stock I want to buy? Why would he desire to sell it? Obviously, he believes it is going down. (View Highlight)
Thus, the seller and I disagree on the future outlook of the security, and that disagreement leads us to agree to exchange. This agreed-upon amount is called price in the exchange markets. Thus, price is a single point of agreement in a situation fraught with disagreement. (View Highlight)
When intrinsic value does not equal market price, then that opinion is currently wrong. (View Highlight)
All new data, analysis, and events are constantly and efficiently “priced into the stock†as investors respond to these events and speculate about their consequences. As a result, all fundamental data, economic data, and any combination of financial or economic ratios lag price. No matter how well a fundamental model is constructed, the fundamentals cannot help one determine when to buy or sell. (View Highlight)
Only volume and technically manipulated data (such as derivatives of price) have been demonstrated to lead price. (View Highlight)
Volume is a literal illustration of the
power behind the forces of supply and demand. (View Highlight)
Volume is understood as the validation of price, the source of
liquidity, the substantiation of information, the fulfillment of convictions, the revelation of divergent opinions, the fuel of the market, the proponent of truth, and the energy behind the velocity of money. (View Highlight)
The same principle applies to trading volume. The more people
participating in a price movement, the more the price movement is validated. For the technical trader, volume dictates the quality of the price. (View Highlight)
“Volume is the truest and most reliable indicator of the market’s ability to facilitate a trade…A market that is not facilitating trade will not survive long.†(View Highlight)
Volume validates price, but it also contributes to forming price.
As new information is disseminated to the public, volume reveals the flow of this information. By observing the change in volume as information is released, a trader can tell how quickly new facts are absorbed by market participants. (View Highlight)
Volume can provide essential information by indicating a price change before it happens. The message is extremely telling, particularly when the volume reaches extreme levels. During such times, volume offers far superior information than price alone could ever provide. (View Highlight)
However, when examined together, they provide indications of supply and demand that neither could provide independently. Ying (1966), in his groundbreaking work on price-volume correlations, stated, “Price and volume of sales in the stock market are joint products of a single market mechanism; any model that attempts to isolate prices from volumes or vice versa will inevitably yield incomplete if not erroneous results.†(View Highlight)