Investing With Volume Analysis by Buff Dormeier- Identify, Follow, and Profit from Trends presents an enlightened perspective on the role of volume, not only in pragmatic terms but also in terms of apprehending the underlying rationale of how and why. Award-winning technical analyst Buff Pelz Dormeier teaches state-of-the-art methods for analyzing the relationship of volume to price movements and the evolution of market trends.
Category: Stock
Author: Buff Pelz Dormeier
Language: English
Introduction/ Foreword
Volume, price, and time are fundamental concepts in market analysis.
Volume tracks quantities of things, whether shares of stocks, contracts in options, or commodities. In business, volume tracks sales, inventory, customers, and the amount of goods bought or sold.
In Investing with Volume Analysis, Buff Dormeier presents new ideas, digging deeper into volume by identifying secrets these often overlooked statistics hold. He has devised methods for identifying when to climb on board and stay with sustainable trends, and perhaps more importantly, when to bail out of trends when unsustainable.
The Volume Price Confirmation Indicator (VPCI) is his creation, and it helps identify these situations. It was a significant enough discovery to earn him the internationally prestigious Charles Dow Award in 2006, only given to a work deemed surprisingly new and innovative.
Buff’s career has combined both fundamental and technical analysis. Earlier, as a student of fundamental analysis, he reviewed the business activities of management and made forecasts based on a company’s financial history and forward guidance. He wanted further understanding about a stock’s price behavior and began studying technical analysis.
He found that technical analysis, at its core, is about the flow of money into and out of securities. Yet these technical findings were not always consistent with what fundamental analysts and company management were saying. As an analytic approach, he settled on two primary tools: price and volume.
Overview
In the continual pursuit for higher profits, investors and traders alike often assume significantly higher risks while chasing the next hot opportunity. Other more sophisticated investors attempt to employ complicated indicators while not fully understanding the information the indicator was designed to reveal. On the other hand, savvy investors employ analysis to gauge the market, positioning themselves to potentially earn higher profits with significantly less risk. Volume analysis attempts to delve deep inside the market trends to help identify shifts within the markets.
Investing with Volume Analysis: Identify, Follow, and Profit from Trends presents an enlightened perspective on the role of volume, not only in pragmatic terms but also in terms of apprehending the underlying rationale of how and why. Award-winning technical analyst Buff Pelz Dormeier teaches state-of-the-art methods for analyzing the relationship of volume to price movements and the evolution of market trends.
Praise for Investing with Volume Analysis
“Investing with Volume Analysis is a compelling read on the critical role that changing volume patterns play on predicting stock price movement. As buyers and sellers vie for dominance over price, volume analysis is a divining rod of profitable insight, helping to focus the serious investor on where profit can be realized and risk avoided.”
—Walter A. Row, III, CFA, Vice President, Portfolio Manager, Eaton Vance Management
“In Investing with Volume Analysis, Buff builds a strong case for giving more attention to volume. This book gives a broad overview of volume diagnostic measures and includes several references to academic studies underpinning the importance of volume analysis. Maybe most importantly, it gives insight into the Volume Price Confirmation Indicator (VPCI), an indicator Buff developed to more accurately gauge investor participation when moving averages reveal price trends. The reader will find out how to calculate the VPCI and how to use it to evaluate the health of existing trends.”
—Dr. John Zietlow, D.B.A., CTP, Professor of Finance, Malone University (Canton, OH)
“In Investing with Volume Analysis, the reader … should be prepared to discover a trove of new ground-breaking innovations and ideas for revolutionizing volume analysis. Whether it is his new Capital Weighted Volume, Trend Trust Indicator, or Anti-Volume Stop Loss method, Buff offers the reader new ideas and tools unavailable anywhere else.”
—From the Foreword by Jerry E. Blythe, Market Analyst, President of Winthrop Associates, and Founder of Blythe Investment Counsel
“Over the years, with all the advancements in computing power and analysis tools, one of the most important tools of analysis, volume, has been sadly neglected. Yes, it is true that it is included in all analysis programs, but the art and science has been almost lost. Buff’s new book should take care of that neglect and restore volume to its rightful place. They say, ‘In the land of the blind, the one-eyed man is king.’ This book will give technicians both eyes. It is clear, well written, and step-by-steps give the reader the tools to understand this important tool putting volume analysis in its proper historical context. It is highly recommended.”
—Richard Mogey, CMF Investment Advisors
“This book forced me to think in new investment directions and to re-evaluate my previous strategies.… I gained insights that were groundbreaking for me.” —Dr. Dennis Henlsey, Taylor University
“I found Investing with Volume Analysis of great interest. Any new study of volume and its great technical importance demands immediate attention. It is good to have Buff’s new ideas and discoveries added to the history and importance of volume in technical analysis. My sincere thanks to Buff for his great work and contribution.”
—Joseph E. Granville, The Granville Market Letter
“The author has gathered in one place all of the major methods and theories that deal with volume in the stock market and has recognized volume as an equal partner with price in the workings of market and stock movements. He puts it all together into usable and readable guidance, using effective analogies and occasional humor.”
—Richard W. Arms, Jr., Arms Advisory
“Buff presents a thorough discussion of the utility of volume and volume-based market indicators, both traditional and of his own creation. Fellow market analysts can be glad for this resource and the fact that the VPCI on Buff himself is in a strongly rising trend.”
—Robert Prechter, CMT, and Dave Allman, Elliott Wave International
“I really enjoyed and appreciated the author’s ability to combine volume with many of the basic indicators used by technicians today.”
—Ralph J. Acampora, CMT, Managing Director, Altaira Investment Solutions
“I trade for a living and don’t have time for fluff and puff. Buff tossed facts and figures in my face like a silver cross in front of a werewolf. He is on to much here, as you will see. This book is not a morsel; it’s a nine-course meal. Dig in.”
—Larry Williams, Private Trader, World Cup Trading Champion
“For every stock trade that takes place, three key pieces of information are recorded: price, time, and size. It is from these three pieces of data that we derive all the key information that technical analysts use to examine a stock’s behavior. If you are only looking at prices, then you are throwing out a whole lot of key information.
Buff’s book teaches you how to take that information about the size of trades and turn it into the seven types of volume indicators. Better still, he teaches you how to use those tools to improve your own trading.”
—Tom McClellan, Editor, The McClellan Market Report
Table of Contents
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Chapter 1: Two Perspectives of Market Analysis 5
Building a Firm Foundation. . . . . . . . . . . . . . . . . 5
Two Legitimate Approaches . . . . . . . . . . . . . . . . . 6
The Fundamental Approach. . . . . . . . . . . . . . . . . 8
The Technical Approach . . . . . . . . . . . . . . . . . . . . 9
Driving a Comparison Between Fundamental and Technical Analysis 10
Chapter 2: The History of Technical Analysis . . . . . . . 12
The First Recorded Investment—A Fill or Be Killed Order. 12
Babylonian Charts . . . . . . . . . . . . . . . . . . . . . . . . 14
Early European Markets. . . . . . . . . . . . . . . . . . . 14
Samurai Trading . . . . . . . . . . . . . . . . . . . . . . . . . 14
Early American Market Analysis . . . . . . . . . . . . 15
The Root—Charles H. Dow. . . . . . . . . . . . . . . . 15
The Shoots—William Peter Hamilton and
Other Dow Theorists . . . . . . . . . . . . . . . . . . . . . 17
Budding Practitioners . . . . . . . . . . . . . . . . . . . . . 17
The Rise of the Fundamentals . . . . . . . . . . . . . . 19
Market Analysis in Today’s Efficient Markets . . 22
Contrasting the Ages. . . . . . . . . . . . . . . . . . . . . . 24
Setting the Record Straight—Dow Theory
Strikes Back . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Chapter 3: Price Analysis . . . . . . . . . . . . . . . . . . . . . . . 27
The Market’s Price Is Right . . . . . . . . . . . . . . . . 28
The Basic Building Block of the Chart. . . . . . . . 28
Volume Analysis: Digging Deeper . . . . . . . . . . . 30
Chapter 4: Volume Analysis 32
Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Volume Terminology . . . . . . . . . . . . . . . . . . . . . . 33
Volume Data in Market Analysis . . . . . . . . . . . . 33
Volume Validates Price . . . . . . . . . . . . . . . . . . . . 34
Volume Liberates Liquidity . . . . . . . . . . . . . . . . 35
Volume Substantiates Information . . . . . . . . . . . 35
Volume Reveals Convictions. . . . . . . . . . . . . . . . 35
Volume Expresses Interest and Enthusiasm . . . 36
Volume Denotes the Disparity of Opinions. . . . 36
Volume Is the Fuel of the Market . . . . . . . . . . . 36
Volume Exposes the Truth . . . . . . . . . . . . . . . . . 37
Volume Is the Cause . . . . . . . . . . . . . . . . . . . . . . 37
Volume Gives Rise to Velocity . . . . . . . . . . . . . . 38
Chapter 5: Volume: The Force of the Market . . . . . . . 39
Volume Is the Force . . . . . . . . . . . . . . . . . . . . . . 39
Volume Leads Price . . . . . . . . . . . . . . . . . . . . . . 39
Volume Interprets Price . . . . . . . . . . . . . . . . . . . 40
B = S = T . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
Volume Analysis—Use the Force. . . . . . . . . . . . 43
Support and Resistance. . . . . . . . . . . . . . . . . . . . 43
Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Every Object in a State Motion Stays in
Motion Unless Acted Upon . . . . . . . . . . . . . . . . 46
Force = Mass × Acceleration . . . . . . . . . . . . . . . 47
Every Action Has an Equal and Opposite
Reaction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
Applying the Laws of Motion in Volume
Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Chapter 6: How to Read the Market Like a Book . . . . 53
Reading the Tape . . . . . . . . . . . . . . . . . . . . . . . . 54
Understanding the Symbols of the Language . . 54
This Is the Market, Allow Me to
Introduce You . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Fear and Greed . . . . . . . . . . . . . . . . . . . . . . . . . . 56
Volume: The Technician’s Decryption Device . 57
Analyzing Price and Volume Bar by Bar . . . . . . 58
The Four Basic Phases of Closing Price Bar Analysis 58
The Price Bar Is the Market’s DNA . . . . . . . . . . 59
Volume Is the Market’s RNA . . . . . . . . . . . . . . . 60
Volume Price-Spread Analysis . . . . . . . . . . . . . . 61
High Volume Depreciation. . . . . . . . . . . . . . . . . 64
Low Volume Price Movements . . . . . . . . . . . . . 67
Chapter 7: Volume in Trends . 73
Identifying Trends. . . . . . . . . . . . . . . . . . . . . . . . 73
Trends: The Words of the Market . . . . . . . . . . . 74
Drawing Trend Lines . . . . . . . . . . . . . . . . . . . . . 74
Evaluating the State of the Trend with
Volume Analysis. . . . . . . . . . . . . . . . . . . . . . . . . . 77
The Four Phases of Volume Analysis . . . . . . . . . 78
Volume Rules and Laws: Cracking the
Contradiction Code. . . . . . . . . . . . . . . . . . . . . . . 85
Volume Seasonality Trends . . . . . . . . . . . . . . . . . 91
Chapter 8: Volume in Patterns . . . . . . . . . . . . . . . . . . . 93
Patterns: The Market’s Narrative . . . . . . . . . . . . 93
Plots: The Interactions of Two Major Trends . . 94
Bullish Flags and Pennant Formations . . . . . . 108
Chapter 9: Measuring Volume Information . . . . . . . 112
The Seven Types of Volume Indicators . . . . . . 114
Optimization: A Warning . . . . . . . . . . . . . . . . . 116
Chapter 10: Pure Volume Indicators 118
Volume. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 118
Volume Moving Averages . . . . . . . . . . . . . . . . . 119
Volume Oscillators . . . . . . . . . . . . . . . . . . . . . . 120
Volume Bands . . . . . . . . . . . . . . . . . . . . . . . . . . 120
Volume Accumulation. . . . . . . . . . . . . . . . . . . . 121
Volume at Price . . . . . . . . . . . . . . . . . . . . . . . . . 122
Price: Volume/Crocker Charts . . . . . . . . . . . . . 124
Chapter 11: Interday Volume Accumulation Indicators 127
On-Balance Volume . . . . . . . . . . . . . . . . . . . . . 128
Volume Price Trend . . . . . . . . . . . . . . . . . . . . . 130
Intraday Volume Accumulation Oscillators . . . 130
Chapter 12: Intraday Volume Accumulation Oscillators 132
Intraday Intensity Index/Accumulation
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Williams’ Variable Accumulation
Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . 133
Williams’ Accumulation Distribution . . . . . . . . 134
Intraday Volume Accumulation Oscillators . . . 136
Chapter 13: Price Range Volume Indicators . . . . . . . . 140
Market Facilitation Index . . . . . . . . . . . . . . . . . 140
Equivolume Charting . . . . . . . . . . . . . . . . . . . . 142
Ease of Movement . . . . . . . . . . . . . . . . . . . . . . 144
Chapter 14: Price Accumulation Based on Volume Indicators 147
Positive and Negative Volume Indexes . . . . . . 147
Chapter 15: Tick-Based Volume Indicators . . . . . . . . . 151
Volume-Weighted Average Price . . . . . . . . . . . 152
Money Flow/Tick Volume. . . . . . . . . . . . . . . . . 152
Chapter 16: Volume-Weighted Price Indicators . . . . . 157
The Money Flow Index. . . . . . . . . . . . . . . . . . . 158
Volume-Weighted Moving Averages . . . . . . . . 159
VW-MACD . . . . . . . . . . . . . . . . . . . . . . . . . . . . 168
Trend Thrust Indicator . . . . . . . . . . . . . . . . . . . 171
Chapter 17: The Volume Price Confirmation Indicator 182
The Calculation . . . . . . . . . . . . . . . . . . . . . . . . . 183
Using VPCI . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
VPCI in Action . . . . . . . . . . . . . . . . . . . . . . . . . 190
The Study . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 194
Other Applications: Comparing the VPCI
to Other Price-Volume Indicators . . . . . . . . . . 198
Other Applications . . . . . . . . . . . . . . . . . . . . . . 204
Volume Indicators Table . . . . . . . . . . . . . 205
Chapter 18: A Compendium of Breadth Indicators 209
Market/Breadth Statistics . . . . . . . . . . . . . . . . . 209
Breadth Statistics: A Source of Market
Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . 211
Warning Construction Ahead: Breadth
Data Pit Falls. . . . . . . . . . . . . . . . . . . . . . . . . . . 214
Breadth-Based Indicators . . . . . . . . . . . . . . . . . 218
Positive and Negative Volume Index . . . . . . . . 219
Arms Index/TRIN . . . . . . . . . . . . . . . . . . . . . . . 220
Chapter 19: Buff Up Your Volume: Introducing Capital Weighted Volume 226
It’s Time to Buff Up Your Volume . . . . . . . . . . 226
Traditional Volume: Price Volume
Relationship Disconnect. . . . . . . . . . . . . . . . . . 227
Blue Chips to Cow Chips . . . . . . . . . . . . . . . . . 229
Index Volume Analysis Alternatives . . . . . . . . . 231
Cap-Weighted Volume . . . . . . . . . . . . . . . . . . . 232
Comparing Traditional Volume Tallies
to Cap-Weighted Volume . . . . . . . . . . . . . . . . . 233
Flash Crash: Cap-Weighted Volume in Action 235
Cap-Weighted Volume: Rebuilding
Breadth Indicators . . . . . . . . . . . . . . . . . . . . . . 238
Chapter 20: Risky Business . . . . . . . . . . . . . . . . . . . . . 241
The Best Offense Is a Good Defense. . . . . . . . 241
The Best and the Worst of It . . . . . . . . . . . . . . 243
The Buy and Hope Strategy . . . . . . . . . . . . . . . 245
Dynamic Asset Allocation . . . . . . . . . . . . . . . . . 248
Risk Management . . . . . . . . . . . . . . . . . . . . . . . 251
The Anti-Volume Stop Loss . . . . . . . . . . . . . . . 253
The Best Mistakes Are the Realized Ones. . . . 256
Chapter 21: Putting It All Together: Volume-Dictated Strategies 259
Employing Volume-Based Strategies . . . . . . . . 260
Understanding the Market: Supply and
Demand. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 260
Building an MPS with Individual
Stock Issues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269
The Four Phases of Volume Analysis . . . . . . . . 270
Chapter 22: Modern Day Volume Issues . . . . . . . . . . . 281
How Trading Volume Has Changed. . . . . . . . . 281
Contrasting Market Ages . . . . . . . . . . . . . . . . . 293
The Effect of Changes in Market Structure on Volume Analysis 302
Volume Data Reliability . . . . . . . . . . . . . . . . . . 303
Bibliography . . . . . . . . . . . . . . . . . . . . . . . 306
About the author
Buff Pelz Dormeier, CMT, (Fort Wayne,IN) is a foremost expert in the field of volume analysis , founder of VolumeAnalysis.com and Chief Technical Analyst @ Kingsview Asset Management . He has over 20 years’ experience dynamically managing private investment portfolios for affluent individuals, institutions, trusts, endowments and financial advisors.
An Award winning industry innovator, Dormeier is the developer of Volume Weighted Moving Averages (VWMAs), the VW-MACD, the Volume Price Confirmation Indicator (VPCI), VPCI Stochastics, the Anti-Volume Stop Loss (AVSL), the Trend Thrust Indicator (TTI), Capital Weighted Volume Indexes, as well as a host of cap weighted volume based breadth indicators. His work with market indicators and trading system design has been published and/or referenced in Barron’s, Stock’s & Commodities, C-NBC,The Financial Times, and Active Trader magazines, as well as the IFTA & MTA Journals.
Buff is featured in “Technical Analysis and Behavior Finance in Fund Management” – a European book comprised of interviews with 21 successful portfolio managers. A Chartered Market Technician, Buff received the 2007 Charles Dow Award recognizing research papers breaking new ground or which make innovative use of established techniques in the field of technical analysis. The Charles H. Dow Award is the most significant competition in the field of technical analysis. He has also been a featured speaker at national and international conferences and author of the critically acclaimed book, Investing With Volume Analysis.
His book, Investing with Volume Analysis is the only book to win both Trader Planet’s STAR AWARD for top Book Resource (2012) as voted on by end users and the internationally prestigious Technical Analyst’s Book of the Year Award (2012) as peer reviewed and voted upon by top industry experts.
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