Indicators & Oscillators
Volume: the crowd's vote count
Price tells you what was decided. Volume tells you how many people were in the room when it was decided. A 3% rally on the lightest volume of the month and a 3% rally on triple the average are the same number on your screen and two completely different events — and only one of them has anybody left to keep buying tomorrow.
Almost every indicator in this course is a rearrangement of the same four prices. Volume is genuinely new information: it counts participants rather than describing prices, so it can confirm or contradict what price is telling you. That independence is exactly why Murphy places it alongside price as the second pillar of technical analysis, and why a signal endorsed by volume is worth materially more than the same signal without it. It is also why stacking three oscillators adds nothing while adding a volume panel adds a great deal.
- Volume should EXPAND in the direction of the trend. Rising prices on rising volume is a healthy advance; rising prices on falling volume is an advance running out of buyers.
- Volume should CONTRACT during a correction. A pullback on light volume is profit-taking; a pullback on heavy volume is distribution, and those are different futures.
- A breakout needs a volume SURGE to be believed. Breaks on ordinary volume fail far more often — this is the single cheapest filter in chart pattern trading.
- A CLIMAX — volume several times the average at the end of a long move — often marks exhaustion rather than strength: everybody who was going to act has now acted.
Two stocks each rally 20% over eight weeks and both look identical on a line chart. In the first, weekly volume rose steadily through the advance and shrank on every pullback. In the second, the biggest volume week was week one and every subsequent week was quieter, with the pullbacks trading MORE than the up weeks. The first is accumulation: new buyers arriving continuously, sellers uninterested. The second is distribution behind a rising price: the early buyers are handing stock to a thinning group of latecomers, and the heavy down weeks are where the real transfer happened. Same 20%, opposite meaning, and volume is the only place you could see it.
In spot foreign exchange there is no central exchange, so the "volume" your platform shows is TICK volume — the number of price updates from your broker's feed, not the number of contracts traded. It correlates with real activity well enough to be useful, but it is not the same measurement and it differs between brokers. In futures you get a genuine volume figure plus OPEN INTEREST, the number of contracts still outstanding, which adds a second dimension: rising price with rising open interest means new money entering, while rising price with falling open interest is mostly short covering — the same rally with a much shorter shelf life.
Elder's own indicator makes the crowd reading explicit. Take a 13-period EMA as the market's consensus of value. BULL POWER is the bar's high minus that EMA — how far above consensus the buyers managed to push. BEAR POWER is the low minus the EMA — how far below they were driven. Read them together with the EMA's direction and you get his buy setup: the EMA is RISING (the trend is up), Bear Power is NEGATIVE but RISING (sellers can still push price below value, but less each time). That combination is a pullback inside an uptrend with the sellers weakening — the same idea as an oscillator pullback, expressed in the units of the bar itself.
"Volume was huge today" is not an observation until you say huge compared to what. Volume has strong weekly and seasonal patterns, it spikes on index rebalancing and option expiry for reasons that have nothing to do with anyone's opinion of the asset, and it collapses in holiday weeks. Always read it against a moving average of itself — most platforms will draw one on the volume panel — and discount the days you know are structural. A spike you cannot explain is information; a spike on the third Friday of the month usually is not.
Price is the conclusion; volume is the vote count behind it. That is why volume leads at turns and confirms in trends: a move can continue on price momentum alone for a while, but it cannot continue without new participants indefinitely. Every warning sign in this course — the shrinking peaks of a head and shoulders, the drying-up inside a triangle, the exhaustion gap, divergence — is the same observation about participation, seen through a different instrument.
A stock breaks above a six-month resistance level. Volume on the breakout day is slightly BELOW its 50-day average. What is the most likely outcome, and what would change your mind? (Most likely a false break that returns inside the range within days — a level watched for six months should attract real participation when it gives way. You would change your mind on a follow-through day: a second close above the level on clearly expanded volume, which says the buyers arrived a day late rather than not at all.)
Volume is the only free input you have that is not made of price, so it is the only place a real second opinion can come from. It should expand with the trend, contract on corrections, surge on genuine breakouts, and it warns of exhaustion when it climaxes at the end of a long move. Read it against its own average, never as a single bar. Know that FX volume is tick volume and that futures add open interest as a second dimension. And when volume and price disagree, volume is telling you about tomorrow.
Turn on the volume panel with a 50-period average on every chart you use, and adopt one habit: before taking any breakout trade, look down at that panel and say the ratio out loud — "today is 1.8× average" or "today is 0.7× average". Do not add a rule yet, just say the number every time. Within a few weeks you will start refusing breakouts before you have consciously decided to, which is what a trained eye actually is.
Indicators & Oscillators