In my opinion, one of the most discussed about but the least understood topics in stock market and commodity market trading is the link between SAR (support and resistance) and volume. There are only few traders who do not plaster at least single volume indicator on their trading chart.
Every trader needs a certain level of volume for liquidity objectives; but there has to be more to volume that only determining liquidity in the market. Most professional traders can get a common idea about volume figures by watching price action, especially when small number of traders are controlling the full market.
Specifically, let’s tackle the question of zero sum markets and volume readings. In a zero sum market there is a buyer for every seller. There are no un-related traders in the market style maker driven stock market. You have seller and buyers and the exchanges job is to match the buyer to a seller at a specific price.
For the objectives of this article, we are going to look at volume readings when a support and resistance points is reached. Let’s say the market has moved five or six bars to the long side and is reached at a point of resistance.
What does volume do at the resistance point?
When volume stays low at support and resistance the probability of the move continuing via resistance is raised. On the other hand, when volume builds to near daily top levels on a bar at support and resistance, though chance that the price will reverse at or around the level of resistance is increased.
When volume builds at support and resistance, you can guess that there are traders with a big position exiting their traders and fresh traders are entering the market to the little side. The result of trading moving out of position and fresh traders entering in the opposite direction makes a top-volume situation.
On the other hand, when volume stays low you can commonly assume that most of the traders are 1 side of the contract and there is small activity on the other contract side. To make things easier, you can watch this process using order flow program and get a perfect understanding of this idea. You can easily watch both the bid and ask columns and see how many traders are active at a given SAR price and determine if the ask or bid side is most active.
Best of luck !!!