Stock Market Volume Analysis is Unreliable: Here’s Why

Stock Market Volume Analysis Doesn't Work
Here's Why Stock Market Volume Analysis Doesn't Work

Today’s article (and video) demonstrates why stock market volume analysis doesn’t work as well as most people think it does. Yes, this is another one of my controversial lessons (like last week’s on trend lines).

Most people are taught that price action and volume are the 2 most reliable things you can use in trading.

Sorry – you’ve been deceived! Stock market volume analysis isn’t as reliable as you’ve been taught to believe and in this video I’ll share with you EXACTLY why.

Enjoy the video and please leave your comments below (even if they’re negative!).

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Hey welcome to this video on trading price action patterns.

Welcome to this tutorial on Stock Market Trading Volume Analysis and Dark Pools.

This is Doctor Barry Burns with Top Dog Trading, and you know I’ve had a lot of people who recently have asked me why I don’t talk more about volume when analyzing stock market charts. And so I am going to share that with you today. I do use volume in my analysis but perhaps not as much as other people. And I’m going to give you the exact reason why, right now.

I’ve had people email me saying, “The only leading indicator is volume.” They say volume’s a leading indicator. Okay, that sentence is completely wrong. Everything about that sentence is wrong.

Number 1, volume is not an indicator. Volume is just what it is. It’s like price. Price isn’t an indicator. It’s not a mathematical calculation of anything. It’s not derivative of data, and neither is volume.


Volume is just what it is. The number of shares in the stock market or lots, or contracts, or forex, or futures that are traded. So it’s not an indicator it is actual fact. So it’s not a derivative of anything. It’s not a calculation. So first of all calling volume an indicator is wrong.

Number 2, it is not leading. It is actually often lagging. So let’s take a couple of looks at that. And I’ll explain to you why it’s lagging. Especially today.

In my trading, I’m buying cycle lows and shorting cycle highs in certain situation. You have to look at the whole landscape of the chart. So for example, you know if I wanted to buy a cycle low here, I would you know buy literally right there. Right at that bar.

Now where does our volume increase come? Our Volume increase comes here. Way up there. So if you were buying this and you’re waiting for a surge of volume, which happens here, you won’t be getting in until here. And how far does the market go. Well it goes there and then it comes down and it breaks this low right here. That means this is not a good time. It’s not optimal time to get into the market.


If you wait for the volume to increase, you are actually getting in late. It is not a leading indicator, it’s not a leading indication. It’s not a leading anything. It’s often late to the party. So I’m getting in before the big volume comes in. the big volume is great but see you would really have to suffer through this move against your position, against these lows, psychologically that can be very challenging to deal with.

Now look over here. We have another obvious surge of volume right here with this bar. And what is that? Well the market’s actually coming down. That occurs on this red bar. So we’ve got this level of volume in here. It finally breaks out above that. But it breaks down, or it breaks out on a red bar, while the market’s coming down. And so that would almost make one think well maybe some big short selling is coming in. No, that’s not at all what happened. In fact it didn’t move down much beyond that at all.

And then the next obvious big surge in volume comes in on this bar. Again late to the party. Not early at the cycle low. Not even at the break out. And so it occurs in about the middle of the move. Hardly a leading indication. And so that’s the second thing wrong with that statement is it is not leading at all.


Right moving to another section here. Here’s one way that I will use volume. And that is not for the beginning of move, you would think that the market would start out with a big surge of volume to get momentum behind the move. And I’ve shown you that that’s not quite the case, usually occurs about in the middle or even a little bit later in an impulse move.

Now here is one place where it does provide quite a bit of accuracy and many situations. And that’s actually the end of a move. So we get this exhaustion pattern. The market comes down and this impulse move down ends on exhaustion.

At this place we get a big move up, so some people might say, oh look see it started a new move. Not really. Because often with these exhaustion patterns like this with big volume, they don’t always go back up, sometimes they’ll just consolidate for a while. I’ve studied many of these charts over and over and over.

Here’s another example. There’s a big surge of volume, and where does the market go? Really doesn’t go anywhere. It just kind of goes sideways from there. And so again here is another surge of volume. Where it comes in. comes in in the middle of the impulse move. Not at the low, and not at the high. It comes in in the middle. To me, that’s late to the party.


Here’s an illustration of what I was talking about before, for exhaustion patterns when doing stock market volume analysis. Here’s an exhaustion pattern, market gap down. We get a nice sound exhaustion pattern candle stick, big volume coming in. now again some people would say, oh that could be a beginning of a new up move. And I said, no it can just go sideways, here it does.

It goes sideways for a while and this is a daily chart, so 1, 2, 3, 4 5, 6, 7, 8, 9, 10, 11, 12, almost about 2 weeks actually. Little more than 2 weeks actually, because these are trading days. So just consolidates for over 2 weeks, and then it goes down a little bit more.

Just because you get in exhaustion pattern type volume, that’s not in and of itself a good reason to take a reversal trade, or in this case to buy. So let’s finish up talking about why this is happening. Why this is true, why it’s so counterintuitive. And why it’s against traditional teaching.

The reason is actually very simple. Volume as a leading indicator just isn’t even accurate. It doesn’t work. It’s not reliable. And the reason is, hold on to your hats.

The primary reason, the big picture is that the big institutions, the big players, pension plans, everybody’s trading this huge money. They don’t want to be trapped. And they know that if they come in with huge orders, everybody in the world looks down there and they can see that volume histogram and they are going to use that. They say, “Oh the big boys are coming in.” They don’t want you to know when they are coming in. so they do a couple of things.

One thing they do is they come in through various means. In other words, they are not going to just buy, in this case Disney, they are going to come in through various markets, through various exchanges, through different financial instruments. The other thing, and they might do it overtime with accumulation.


The other thing though that a lot of people are not of aware is dark pools. What are dark pools? Dark pools are non-exchange trading in the markets. So it’s basically institutional investors who want to buy or sell huge, maybe a million shares of a stock. They don’t want you to see that. So they actually will go to a dark pool. Which is basically private exchanges or forums, for trading stocks.

It’s not a public stock exchange. So the volume, that they are trading, they are trading it but it won’t show up down here on your volume histogram. And by the way they are a big deal. This is not something that’s just occurring on a small scale.

In fact I did a little research on this, and Investopedia said that in 2014, Non-exchange trading in the US accounted for about 40% of all US stock trades. 40%. So how can you rely on volume when 40% of the volume, and that by the way, 40% is not the little guy. That 40% are the big institutions. The pros, the whales, the smart money. The smart money is not showing up here my friends. And that’s why volume is very deceiving, not only it isn’t reliable, looking stock market volume analysis can actually be very deceiving.

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