Chapter 7 Volume and open interest

Introduction Price is by far the most important. Volume and open interest are secondary in importance and are used primarily as confirming indicators. Volume: The number of entities traded during a day or a week. Our main concern is daily volume. Volume is usually not used on monthly charts. Open interest: the total number of outstanding or un-liquidated contracts at the end of the day. Volume applies to all markets. Open interest applies primarily to futures market.

Volume become larger as price are rallying

Volume for all markets The level of volume measures the intensity or urgency behind the price move. [Confirmation] Volume should increase in the direction of the existing price trend. (Figure 7.3, 7.4) In an uptrend, volume should be heavier as the price moves higher, and should decrease on price dips. In a downtrend, volume should be heavier during down moves and lighter on bounce. [Divergence] Divergence occurs if the penetration of a previous high by the price trend takes place on volume declining. (diminishing buying pressure)上漲無量 So, if the volume tends to pick up on price dips in an uptrend, the uptrend might be in trouble.注意:上升趨勢中，下跌時有量。

Volume and price

Volume and price

Volume revisited Head and shoulder- light volume at head, heavier at neckline Double and triple tops- lighter volume at successive peaks, followed by heavier downside activity. Continuation patterns, like triangles, should be accompanied by a gradual drop off in volume. [General rule] The resolution (break out) of all price patterns should be accompanied by heavier trading volume if that breakout is real. (Figure 7.5)

Volume revisited

On balance volume (OBV) By monitoring the price and volume together, we are actually using 2 different tools to measure the same thing-pressure. Volume precedes price. Changes in buying or selling pressure are often detected in volume before price. OBV helps measuring the direction of volume pressure. [Construction] A higher (lower) close counts for a positive (negative) volume. A running cumulative total volume is then maintained. It is the direction of the OBV line (its trend) that is important , not the actual number themselves. The OBV line should follow in the same direction as price trend. (see Figures 7.6 and 7.7)

Much easier to spot the 10/1997 downturn by using OBV

OBV

Overlap of OBV and price