Financial Volume Index And Volume Analysis
by Patrick Cifaldi, C.M.T.
In technical analysis, the study of volume is one of the most overlooked and underrated disciplines. In
the general study of the supply and demand of markets, only two pieces of data are recordable: One is
price data, while the other is volume data. Open interest is regarded by some as a third, but in many ways
it is really a record of the outstanding potential volume. But most articles and research written and
performed relates only to price analysis. Such an oversight is not unlike designing a great
automobile—without engineering the engine.
THE LONELY DISCIPLINE
Some disciplines disregard volume analysis altogether. Theoretically, Gann analysis, the Elliott wave
principle and Fibonacci ratios are three such disciplines. Such studies do produce positive results and add
a structure to the very unstructured world of market analysis. In no way am I implying that these studies
are unimportant; the true masters of such studies incorporate many tools in their work, including volume.
Volume studies do have their heroes: Analysts such as L.M. Lowry, whose analysis of volume data in the
1930s has been used as a foundation tool by many current analysts; Jim Sibbet, who developed the
Demand Index; Marc Chaikin, who developed a method that breaks a period's trading volume down into
how much was up volume and how much was down volume; and Joseph Granville, perhaps the most
famous proponent of volume analysis. His volume analysis methods are so varied that I could not attempt
to summarize his work in this limited space.
These analysts have something in common with other analysts who use volume as an analytical tool; all
attempt to measure the flow of funds in a marketplace. Volume could be compared with the amount of
fuel in an engine. Without volume, or fuel, the market does not move, and if the fuel is plentiful, the
market has the potential to move sharply. The measure of this fuel is the key to analysis.