Written by A.J. Brown

Volume Validation

Here’s something few option traders know: Price action without volume is practically meaningless.

Imagine a room of 100 people. The people are voting on the main course at an upcoming barbecue. One option is hamburgers; the other option is steaks.

Now let’s assume the voting is spread out over two days. On day one, 10 people vote for hamburgers and only 1 votes for steak. The "price" (so to speak) moves up in favor of hamburgers, even though the volume of the people voting is low.

But then on day two, the other 89 people vote… and they all vote for steak. The "price" of hamburger drops quickly while the "price" of steak goes way up.

This little imagination play helps to illustrate the importance of volume.

As I like to say, "Volume is the great validator." The volume behind price movement is what validates the move. If  there’s no volume, then there’s no force behind the movement. It’s like seeing smoke. But if there is large volume behind a price movement, now you have something solid on which to base your trading decisions.

Do you check volume before making trades? If not, why not? All option traders should devote time to studying volume and how it affects price movement. It is a critical concept to understand to be successful in trading.

Best Regards Always,

A.J. Brown

Categories: Education / Options

One Response to “Volume Validation”

  1. Big Volume Is Like a Left Hook @ 2:12 pm (Pingback)

    [...] writing yesterday’s blog post, I was still thinking about volume and how to explain it using a different analogy. Boxing came to [...]

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