Price, Volume, Demand & Supply Relationship

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All technical indicators are based on price and/or volume behavior, usually both. One might surmise, therefore, that to get at the root of all this, one should study the relationship of price and volume in addition to the proper use of technical indicators. Maybe instead of technical indicators. But you wouldn't be going far enough. Price and volume behavior are further dependent on the relationship between supply and demand. Therefore, in order to make consistently profitable trades/investments over the long haul (perhaps even the short haul), it is absolutely essential that you understand how the relationship between supply and demand affects what happens to your market. Using technical indicators as a shortcut through this landscape is like trying to drive a car without first understanding the functions of the steering wheel, the brake pedal, and the accelerator.

Price, Volume Relationship

Volume leads Price. In order to comprehend how this statement (both in concept and in practice) represents a true and accurate assessment of market dynamics, a trader needs to understand the basic structure of all markets and how such markets operate. Since all markets represent a fractal nature (a geometric pattern that is repeated at every scale), by correctly and thoroughly applying a framework a trader can begin to see the Price / Volume Relationship at work – all day, everyday.

In trading terms, unless and until the volume cycle sequences reach completion, the current price trend cannot end. In general terms: if Volume is increasing, then the Price Trend is continuing. Such is the essence of the Price / Volume Relationship.

Lets have a look at some Price/Volume interactions:
  1. A price advance with steady increasing volume.This indicates possible continuing upward momentum. As the price is climbing, more and more buyers are getting attracted until the stock gets into a stage of euphoria that can indicate the end of the price advance.
  2. A slowing pace of buying with decreasing volume. This indicates that the top may be near. This is also referred to as "buying which is drying up". It has two possible outcomes:
    • Sellers realise that the top might be near and start selling, causing the stock to reverse lower.
    • The stocks starts consolidating and gets supported by strong bids, which indicates that a move higher may be likely later.
  3. A relatively big volume increase during the price advance with lower volume on a price pull back indicates a possible continuing up trend. The lower volume during the pull back indicates that there are not enough sellers in the market to drive the stock down - No conviction of price drop sentiment.
  4. Big buying volume without the price going higher indicates distribution, which means resistance. A big seller may be likely in the market. There is no way to tell yet if the buyers will win this battle and are able to drive the price higher, or if they will give up and the stock eventually reverses.
  5. A slow and steady movement upward with consistent volume indicates continuing upward momentum. There might be a buyer in the market who is steadily buying shares while trying to not attract too much attention.
  6. An extreme acceleration in the price advancing (an almost vertical movement) is usually not sustained. This indicates the end of this stage of the move (euphoric stage). This is a very common scenario. The best example is the Nasdaq market itself in the beginning of 2000; you all know what happened. Those stages of euphoria are very important exit signals for me. They can also present very interesting entry points especially after a stock had a panic sell off.
Much debate has ensued over the years with respect to whether or not volume represents helpful and / or useful information with respect to understanding price change. Those individuals who do find value in volume analysis have long argued their viewpoint for the best methodology for divining the information from volume itself.  We'll delve into this subject completely later in the course, but for now just understand that this relationship is up there in technical analysis importance.

Supply and Demand

In a nutshell, when demand is greater than supply, prices go up. When supply is greater demand, prices go down. Sounds simple, doesn't it? But as simple as it may be, it nevertheless confounds many investors.  We'll talk about supply and demand below and more can be found at Support and Resistance & Why They Matter, as supply and demand are key to these important concepts. 

The relationship between supply and demand plays an important role in our study of markets. In fact, support and resistance levels are nothing more than an expression of the supply-demand relationship. For instance, in the figure below, we have two diagonal lines, supply and demand. The supply line shows the number of sellers willing to sell at a given price.  The demand line shows the number of buyers willing to buy at a given price. Quite simply, as the price increases, the number of buyers willing to buy at the higher prices decreases. 

In the chart below, resistance occurs where the price bumps the ceiling because there are no buyers willing to pay the higher price. Support occurs on the left side of the supply line where sellers are no longer willing to sell at the low prices. Now, this is only a snapshot in time and the position of these lines changes continually during market action, reflecting the changing opinions and expectations of investors. The chartist looks for signals in the price and volume relationships to discern the direction of the changes.

In this figure, when the price equals $23, there would be about 5 willing buyers and 17 willing sellers. Which direction do you suppose the price will move? The dynamic of free market activity is profoundly evident in this example.

Trading volume is the primary indicator of supply and demand. Used with the price charts, volume data can help us look ahead to where the price is going. If the volume is heavy when the price is rising, the rise is likely to continue. However, if the price is rising on declining volume, it will probably not continue its rise for long. It is from the combination of price and volume that all technical indicators derive their value. We must add timing to this duo since the charts are all plotted with respect to time.

Fundamental analysis tells us what a stock should be doing. Stock charts tell us what the stock is doing. This means technical analysis can be viewed as a short-cut. The chartist can analyze a stock without plowing through all the fundamental data. It is enough to say, when a price is rising, the market considers its fundamentals bullish. The chartist does not care what those fundamentals are.


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All technical indicators are based on price and/or volume behavior, usually both. One might surmise, therefore, that to get at the root of all this, one should study the relationship of price and volume in addition to the proper use of technical indicators. Maybe instead of technical indicators. But you wouldn't be going far enough. Price and volume behavior are further dependent on the relationship between supply and demand. Therefore, in order to make consistently profitable trades/investments over the long haul (perhaps even the short haul), it is absolutely essential that you understand how the relationship between supply and demand affects what happens to your market. Using technical indicators as a shortcut through this landscape is like trying to drive a car without first understanding the functions of the steering wheel, the brake pedal, and the accelerator.

Price, Volume Relationship

Volume leads Price. In order to comprehend how this statement (both in concept and in practice) represents a true and accurate assessment of market dynamics, a trader needs to understand the basic structure of all markets and how such markets operate. Since all markets represent a fractal nature (a geometric pattern that is repeated at every scale), by correctly and thoroughly applying a framework a trader can begin to see the Price / Volume Relationship at work – all day, everyday.

In trading terms, unless and until the volume cycle sequences reach completion, the current price trend cannot end. In general terms: if Volume is increasing, then the Price Trend is continuing. Such is the essence of the Price / Volume Relationship.

Lets have a look at some Price/Volume interactions:
  1. A price advance with steady increasing volume.This indicates possible continuing upward momentum. As the price is climbing, more and more buyers are getting attracted until the stock gets into a stage of euphoria that can indicate the end of the price advance.
  2. A slowing pace of buying with decreasing volume. This indicates that the top may be near. This is also referred to as "buying which is drying up". It has two possible outcomes:
    • Sellers realise that the top might be near and start selling, causing the stock to reverse lower.
    • The stocks starts consolidating and gets supported by strong bids, which indicates that a move higher may be likely later.
  3. A relatively big volume increase during the price advance with lower volume on a price pull back indicates a possible continuing up trend. The lower volume during the pull back indicates that there are not enough sellers in the market to drive the stock down - No conviction of price drop sentiment.
  4. Big buying volume without the price going higher indicates distribution, which means resistance. A big seller may be likely in the market. There is no way to tell yet if the buyers will win this battle and are able to drive the price higher, or if they will give up and the stock eventually reverses.
  5. A slow and steady movement upward with consistent volume indicates continuing upward momentum. There might be a buyer in the market who is steadily buying shares while trying to not attract too much attention.
  6. An extreme acceleration in the price advancing (an almost vertical movement) is usually not sustained. This indicates the end of this stage of the move (euphoric stage). This is a very common scenario. The best example is the Nasdaq market itself in the beginning of 2000; you all know what happened. Those stages of euphoria are very important exit signals for me. They can also present very interesting entry points especially after a stock had a panic sell off.
Much debate has ensued over the years with respect to whether or not volume represents helpful and / or useful information with respect to understanding price change. Those individuals who do find value in volume analysis have long argued their viewpoint for the best methodology for divining the information from volume itself.  We'll delve into this subject completely later in the course, but for now just understand that this relationship is up there in technical analysis importance.

Supply and Demand

In a nutshell, when demand is greater than supply, prices go up. When supply is greater demand, prices go down. Sounds simple, doesn't it? But as simple as it may be, it nevertheless confounds many investors.  We'll talk about supply and demand below and more can be found at Support and Resistance & Why They Matter, as supply and demand are key to these important concepts. 

The relationship between supply and demand plays an important role in our study of markets. In fact, support and resistance levels are nothing more than an expression of the supply-demand relationship. For instance, in the figure below, we have two diagonal lines, supply and demand. The supply line shows the number of sellers willing to sell at a given price.  The demand line shows the number of buyers willing to buy at a given price. Quite simply, as the price increases, the number of buyers willing to buy at the higher prices decreases. 

In the chart below, resistance occurs where the price bumps the ceiling because there are no buyers willing to pay the higher price. Support occurs on the left side of the supply line where sellers are no longer willing to sell at the low prices. Now, this is only a snapshot in time and the position of these lines changes continually during market action, reflecting the changing opinions and expectations of investors. The chartist looks for signals in the price and volume relationships to discern the direction of the changes.

In this figure, when the price equals $23, there would be about 5 willing buyers and 17 willing sellers. Which direction do you suppose the price will move? The dynamic of free market activity is profoundly evident in this example.

Trading volume is the primary indicator of supply and demand. Used with the price charts, volume data can help us look ahead to where the price is going. If the volume is heavy when the price is rising, the rise is likely to continue. However, if the price is rising on declining volume, it will probably not continue its rise for long. It is from the combination of price and volume that all technical indicators derive their value. We must add timing to this duo since the charts are all plotted with respect to time.

Fundamental analysis tells us what a stock should be doing. Stock charts tell us what the stock is doing. This means technical analysis can be viewed as a short-cut. The chartist can analyze a stock without plowing through all the fundamental data. It is enough to say, when a price is rising, the market considers its fundamentals bullish. The chartist does not care what those fundamentals are.


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