It depends on where you are

In trading stocks, we often refer to both these terms, which are in effect interchangeable, and the only significant difference is that you will tend to find American traders use the word stock, whilst European traders will tend to use the word share. Interestingly, the markets are generically referred to as stock markets, wherever you happen to live in the world.

In simple terms a stock or share, for our purposes mean the same thing, and in buying a stock or share we are in effect buying a tiny part of the company, and as a result have an entitlement to vote as a shareholder at any AGM’s ( Annual General Meetings) and in addition are entitled to receive any dividends which are duly paid by the company at regular intervals.

All stocks are traded through a central exchange in a highly regulated market, and the largest of these by market capitalization is the New York Stock Exchange, which currently lists in excess of 2,700 companies and has an average daily trading volume in excess of $175 billion dollars.

London, of course has the London Stock Exchange in the square mile, whilst Japanese stock traders trade though the Tokyo Stock Exchange. All of these stock exchanges have several things in common. First, they are all highly regulated, ensuring that all buying and selling is conducted in a transparent way. Second, these markets are often referred to as the cash markets, to differentiate them from futures or derivatives markets, and when you hear stock traders refer to the cash market, this is what they mean, as all trading is conducted with real cash changing hands for real share certificates, which then bestow the benefits of company ownership on the holder.

Finally, all stocks or shares traded through the exchanges are bought and sold, either by electronic systems where buyers and sellers are matched automatically, or alternatively through the market makers, who are obligated to make a market in every stock or share traded. This means that whenever you wish to sell your stock online, there will always be a buyer, and conversely whenever you wish to buy, there will always be stocks or shares available to buy.

The market maker

The role of the market maker is to provide liquidity to the stock markets each and every day, and it is this unique position to see both sides of the markets, that gives them the opportunity to manipulate the markets to achieve their own objectives. Is this known as insider dealing?  The simple answer is yes, of course it is, but without the market maker, there would be no market, so regulators and governments ignore this issue, knowing that any legislation or attempt to curb these activities would bring the worlds economies crashing to their knees.

In other markets, such as forex trading, we have similar problems, where in this case the market maker is the broker, who first creates the market, takes your order, fills the order, and then trades against you, in this case more blatantly, by manipulating his prices on screen, slippage of spreads, and taking out your stops to close out your trades. The market makers in the stock markets, conduct their business in much the same way, by manipulating prices in thin markets or on major news announcements, in order to trigger stop losses or simply shake traders out of winning positions.

If all the above seems unfair or perhaps fictional, as you become more experienced as a stock trader you will be able to see these tricks being played throughout the trading day, but trust me, this is how the stock markets work. There may be some variation between them, but as a general rule the stocks of the largest companies are traded through an electronic system, whilst all other stocks are bought and sold by the market makers who are the major banks designated to act in this role, and who generally manage a basket of stocks for which they are solely responsible in the market. As market makers the profits they generate run in to billions every year, and having been honing their skills for centuries, they are extremely skilled at manipulating the markets to meet their own objectives.

However, there is one aspect of their trading activities that they cannot hide, which is volume. Learn how to trade stocks using the volume indicator and you will start to read the market and trade with the market makers, rather than against them as most stock traders do!

Now it is a sad fact, that many stock traders either choose to assume this is pure fantasy on my part, or simply will not accept that this is a fact. However, use the tools I will teach you and it is immediately self evident, once one starts to analyze the price action in the stock charts, when compared with the associated trading volume, and the analogy I use to describe what we call ‘volume price analysis’ is simple. To move anything up hill takes effort, or in our case volume – if the market is moving higher but with no effort, then clearly this is an anomaly, as to move the market higher requires effort, or in our case, volume. Similarly, to move something lower takes momentum – if the market is moving lower with no momentum (or volume), then again this is an anomaly. This simple analysis lies at the heart of volume price analysis (what I call VPA) and provided you accept the first principle that the stock markets are manipulated by the market makers, then VPA becomes a powerful tool to allow you to see ‘inside’ the markets, and as a result, buy when the market makers are buying and sell when they are selling. This forms the cornerstone of volume price analysis which we will look at in more detail in the trading education section of the site.

The market makers role

Let’s start with a very simple example, and I will see if I can convince you as to how the market makers push the markets around each day.

Imagine that you are one of these privileged companies, and have been appointed to make a market for ABC stock, and on your first day you check your trading screen to find that you have more buyers than sellers, so your level of stock is building accordingly. Buyers are few and far between and with the market falling you are having difficulty moving the stock, as prices continue to fall and more sellers come onto the market. You wonder if all the other market makers are having the same problems, as more and more sell orders come onto your books, and of course they are, only this is not communicated to you, but it will almost certainly be the case.

Suddenly, a piece of good news hits the news services, and you see an opportunity to start pushing prices up again, slowly at first, and not supported by any buying initially, so the volumes are low, but gradually you move prices up more quickly, and as a result, buyers come into the market, fearing that they are losing out on a strong move higher and begin buying once again, giving you sufficient time to clear your stock to manageable levels, before allowing the true market sentiment to take over once again, with the markets falling as before.

Your fellow market makers are doing exactly the same, as you all have the same problem of over supply! The new buyers will be trapped at the higher price, hoping for a recovery, and you can shake then out later for a profitable trade in the future. Before moving your prices higher on the news, you also had the opportunity to temporarily spike your price lower, to catch some stops to the downside, before moving the price higher in the short term. Fact or fiction? You can see this happening every day of the week provided you accept this as a basic concept.

If you do not, then that’s fine, and there are may who do not believe this is true. Personally, I have studied it too long, and have watched it happening day in and day out, not to believe it is a fact of life when trading, but one we can turn to our advantage using volume spread analysis, a subject in itself, but I will try to give you an introduction so that you can at least begin to practice this technique for yourself.

Trading education – volume price analysis

book-volumepriceanalysisVolume price analysis can really be summed up in one sentence. It is the study of anomalies between the price and the volume on the chart from which we can then deduce the future direction of the market. Volume you see, is the only true leading indicator, which reveals market intent. All other indicators are lagging to a greater or lesser extent.

As humans, one of the unique abilities we have is to be able to judge instantly between groups of items and to be able to spot anomalies or difference very quickly, so if we line up a group of people in a row, within seconds we can spot who is the tallest, who is the shortest, and who are of average height. This is a valuable skill when using volume price analysis, as our starting point is to look at the trading volume below each bar, and to highlight those which are very high, those which are very low and those which are average.

It doesn’t matter which time frame you are using, volume in stock trading will be available in all the charts, both in the cash markets and also in the futures markets, from the minute to the day and beyond. So we now have our chart, with the volume indicator appearing at the bottom, and we can see the trading volumes under each candle and therefore identify the anomalies, and whether the volume we are considering is low, normal, or high. What do we do next?

Volume price analysis – putting it all together

If you accept the premise that the market makers see both sides of the market, and move their stocks to balance their books accordingly, then you must also accept that this trading activity cannot be hidden, and therefore appears in the volume bar at the bottom of each chart.

If you also accept the fact that to move markets higher requires effort (volume) and to move market lower requires momentum (volume) then if there is an anomaly in our analysis by virtue of a lack of volume, then this is a warning signal that the market makers are not joining in the move, and therefore this is a false move, either higher or lower. Additionally if we see very high volumes and the market is not moving, then this again is an anomaly, and warns of a turning point, either from a high to a low, with the market makers struggling to dump stock on the market, or from a low to a high as they accumulate stock, preventing the markets falling further as a result.

This is the foundation of volume price analysis and you can see this in action every day by studying a stock chart with a live volume feed below. Early morning trading in particular is a favorite for the market makers, as the markets open with thin trading volumes, they often push a price higher, just to see whether there are any buyers around to test the market, and as a result, the price goes higher on no, or very low volume – this immediately tells you it is a trap up move, to suck you into buying. Instead you wait, and go short, as soon as you see a shooting star candle, as you know the market will pullback as the market makers are not putting their own money into the move higher. If there is only one trading session to watch, I would urge you to watch the opening of the stock market, as it is one of the most revealing times, and will convince you that volume price analysis is fact and not fiction.