The Relationship Between Volume & Price

Today we will be discussing the relationship between volume and price and how to use it to our advantage.

Most traders know that volume impacts price, but many don't realize that price can also impact volume. It's a different type of relationship, but it's still crucial to understand.

Important Concepts:

1) Buyer-Seller Relationship

2) How Price Impacts the Balance

3) Volume Analysis

Buyer-Seller Relationship

Understanding the concept of Supply & Demand will help you grasp the buyer-seller relationship. Every stock has buying and selling volume. If there is more buying volume, the stock will go up. If there is more selling volume, the stock will go down.

The buyer-seller relationship is constantly shifting based on factors like the stock, timeframe, economic climate, and price. In example 1, the buyers had more volume than the sellers. In example 2, the sellers had more volume than the buyers.

In this relationship, someone almost always has control of the volume. If there are more buyers, they are in control. If there are more sellers, they are in control. Identifying who is in control and finding control flips is how you can identify strong trends and reversals.

How Price Impacts the Balance

As the price changes, the number of buyers and sellers also changes. This causes trends to steepen, flatten, or reverse. Price changes cause buyers/sellers to exit positions, switch sides, or add new positions.

As a trader, you will often hear statements like “I'd be a buyer at XYZ price.” This refers to the impact of price on buyer/seller actions, which in turn changes the volume balance.

For a price reversal to occur, the sentiment with more volume must flip. In the example, buyers found the lower price attractive, and sellers began to switch sides until there were more buyers than sellers. Consequently, the price reversed.

Adding Volume Analysis

Volume analysis is where we separate ourselves from basic Supply & Demand concepts. By combining volume analysis with the buyer-seller relationship and current price, we can gain valuable insights.

In the example, we have more buyers than sellers, but the overall volume is decreasing. This indicates that the lower volume breakout had fewer buyers compared to the high volume breakout.

When we pair volume analysis with our current price reaching new highs, we get a clear picture. Buyers are running out of overall volume while the price is increasing. This suggests that buyers are likely switching to sellers, and the price is attracting new sellers.

Building a Plan:

Here is a simple checklist I ask when analyzing the current Volume & Price Relationship:

1) Are buyers or sellers in control?

2) Is the price relatively high or low compared to recent prices?

3) Is the volume indicating strength or weakness?

Answering these questions will provide insights into:

1) Which sentiment currently has more volume

2) Whether the recent change in price is causing buyers/sellers to switch and/or new volume to enter

3) Whether the current control is strong or showing signs of reversal

My Thoughts When Looking at Volume:

These are fundamental market ideas but can be confusing for beginners.

As the price changes, buyers and sellers make decisions that impact the current volume balance.

Volume analysis will show you if the current control is strong or not.

Control flips can be profitable.

I use this thought process for scalping, swing trading, and investing. I always analyze price with a “who has control? are they strong?" mindset. Understanding the volume and price relationship will explain many market moves that may have been unclear before.

Important Concepts:

Buyer-Seller Relationship

Building a Plan:

My Thoughts When Looking at Volume:

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