Volume - what does it Mean?

I've remarked many times that there are three factors that, if understood well, will go a long way to improving your technical analysis of the market. Like everything else, they are not foolproof yet they do consistently produce results which is why we trade the market. These three factors are time, price and volume. I propose to do a series on the three factors here starting with volume.

Volume
What is volume? In the most simplistic terms, volume is a statement of intent. There's up volume and down volume. For individual stocks, you will not find such a listing though although for the indexes you get an aggreate of this across all stocks in that index. That doesn't mean that the data doesn't exist, it's just not available. You can get a sense of up versus down volume from the charts however by assuming that a day where prices increase you count that as an up volume day and vice versa when a stock declines, that's counted as a down volume day.

But what does it matter whether the majority of the volume is occuring on an up day versus a down one? Why should one care?

Why Volume Matters?
Volume is the essence of supply and demand and in the end, the supply and demand is what moves prices. Since we trade in order to make money, it's important to understand if there are more buyers or sellers of a stock at a given point in time. Volume can help to tell you that.

The other thing volume does is that in many situations, volume precedes price. By that I mean that volume signals occur before price signals. When larger buyers are either accumulating a stock or distributing it, they typically leave their footprints in the volume bars. Sure it will be reflected in the price as well, but its in the volume bars that we can make sense of what price is doing and many times volume signals will clue us into what price is about to do.

So if volume can tell us so much ... how can we make sense of it?

Interpreting Volume
The most significant problem with interpreting volume is the scant information we have to work with. First of all, as mentioned above, we don't have a day-to-day accounting of how much volume was a buyer hitting the bid versus a seller hitting the bid ... in other words, who was initiating the action. That would be the cleanest data if it were available. Instead, what we have are the following:

1. Over all volume on a intraday, daily, weekly, and longer time frame
2. Price that correlates with the above volume time frames
3. Direction of prices - the short, intermediate and long term trends for the time frames being studied

... more to come ...