The common adage of rising volume equaling a strong trend and volume spiking during a move equates to moving in the right direction. What if these volume-based assumptions are leading you to failure in your trades? The truth is, volume “lies” of these sorts are one of the biggest trading misconceptions. Traders who follow these myths can unwittingly make decisions which go against the market’s true intentions and thus lose money.
Traders will also have a number of advanced platforms and tools that can bring volume data with just a few clicks. Many of them even have scanners for high-volume days, indicating opportunities ahead. But relying too heavily on volume without understanding nuances can lead to mistakes. You need to change the way you interpret the data, not the platform.
In this article, I will expose three common volume lies that are misleading traders. I’ll explain why they fail and, more importantly, show you the opposite truth of what successful traders use to their edge. By understanding volume correctly, you can make better decisions that are in line with true market dynamics.
Volume Lie #1: Price Moves Up with Increasing Volume
Probably the most frequent volume lie is that price movements up should be accompanied by increasing volume. Many traders assume rising volume during an uptrend confirms the strength of that trend. The general thinking is, volumes push the market — more participants, more action, stronger trend. But here’s the truth:
Often, the price is going higher even while actual volume is declining. In fact, declining volume during an uptrend does not inevitably indicate trouble; there are situations wherein it heralds consolidation before the major move. If you go by the common wisdom that rising volume is essential for a sustainable uptrend, you can readily miss opportunities wherein prices go higher with declining volume.
This is a counterintuitive but important concept. The market typically operates in the opposite direction of what traders anticipate. For example, if you thought that reducing volume indicated the trend was not sustainable, you were incorrect. Trading against such a misunderstanding as this one will provide you with better opportunities as it tends to be where the professionals operate.
Volume Lie #2: Big Volume Should Always Be on Wide Range Bars
Another volume lie traders believe is that big volume should always occur during wide range bars. This myth suggests that when a bar is large in terms of price movement, the volume should do so as well. The logic is simple: more price movement equals more volume, which is seen as confirmation of the strength of the move.
But this is not always true. Volume on wide range bars does not necessarily mean that it is a good signal. On the contrary, it often signals a false breakout or trap. Some traders who pay attention to large volume on high price movements often fall prey to the emotional temptation and lose control over their decisions.
Big volume with a narrow range bar, in other words, where price doesn’t move much in either direction. That’s a potential sign that something is brewing beneath the surface, even though the price action isn’t loud and boisterous. Large volumes usually imply a lot of activity going on in the background, and potentially even an imminent breakout in the near future.
For example, consider a stock like AAPL, which experienced a day of high volume, but no real movement in price. Most people might think nothing is happening, but it’s during these days that the pros are setting up for the next big move. If you catch on early, you can position yourself so you can take advantage of the breakout when it occurs.
Volume Lie #3: The Professional Traders Are Just Following the Crowd
Finally, a third volume lie is the idea that professional traders follow the crowd or the “herd mentality.” You’ve probably heard the phrase, “the market is moving because everyone is doing the same thing.” Many believe that if the volume spikes in a certain direction, it’s an indication that the majority of traders are behind the move. The truth is, professional traders don’t follow the herd—they lead it.
Whenever volume spikes, it is an indication that the professionals are stepping into the fray. They don’t want you to know their next move, so they go about deliberately executing counterintuitive strategies. They look for opportunities where they may trade against the crowd, and this is when the “invisible edge” comes into play. You’ll often find that professionals are setting up positions when others are most excited or fearful. By following the crowd’s actions, you’re likely entering trades too late or getting caught in a false move.
To get ahead, professionals tend to take positions when others are at a loss or confused. And it is here that the study of volume patterns shall prove essential. Whenever you notice volume coming in during a time when price action is uncertain or lackluster, that’s the time to pay attention. It is not about following volume but interpreting it in the proper context.
Putting It All Together: Using Volume to Your Advantage
So how do you use volume the right way to avoid all these usual pitfalls? Well, look for the opposite of what everyone else is doing and grasp the real nature of volume signals. Here is how:
- Do not rely merely on volume for confirmation. While these are vital indicators, price action is the one that should be primarily relied upon. Volume can always confirm or deny what you see on the chart in terms of prices, but it is never the sole basis for making a decision in trading.
- Volume in narrow-range bars signals that the crowd is active even if price does not appear to be moving. It is signaling a larger move is near in the market.
- Know that professionals are going against the crowd as well. When everyone else is reacting at a volume spike, professionals are usually setting up a position to take advantage of the misdirection.
Learning to correctly interpret volume means beginning to make smarter, more calculated trades. Remember, trading is not about following the crowd—it is about understanding market psychology and positioning oneself in a manner in which to take a slice of the hidden opportunities.
Conclusion
Common volume myths can be dangerously easy to follow. A lot of traders fall into the trap of poor decision-making by following myths such as price moving up on increasing volume, big volume on wide range bars, and following the crowd. To succeed as a trader, you need to break free from these myths and work toward a sophisticated understanding of volume.
The thing is, if volume is applied correctly, it can turn out to be quite a powerful tool. But you must recognize the situation when the crowd is wrong. It is possible to get the best position by using volume in conjunction with price action, especially when there are narrow range bars with significant volume. To improve your accuracy in entries and exits consider using tools like a precision entry indicator already hidden in your trading platform. This will allow you to make more calculated and informed decisions by taking the guesswork out of your trades.
Understanding the truth about these volume lies, you can enhance your trading strategies and avoid costly mistakes that most traders make. Do not let volume lies fool you.
