Can watching the market's price and volume action improve your returns?

Posted by Stephen Sutherland on Tue, Apr 17, 2012 @ 12:30 PM

Price and volume actionIn my opinion, having a good understanding of the market's and leading stock's price and volume action could help give your ISA and SIPP returns a boost.

Being able to interpret price and volume action could help you:

  • get in sync with the market's trend and future direction
  • make sense of the market's health

  • make better informed investment decisions
  • ultimately attain better ISA and SIPP returns.

In an upwards trending market, the market's health is good and strong but in downwards trending markets, its health deteriorates and becomes weak. This is important to grasp because in rising markets, 75% of securities such as stocks and investment funds will rise. However in falling markets, 75% of securities will fall.

This is why getting in sync with the market's trend and direction is vital for long-term investment success. The way to get in sync is to learn and study the price and volume action of the market and the price and volume action of leading stocks.

I learned about the importance of following price and volume action over a decade ago from legendary investor William O’Neil. I was immediately sold after discovering O’Neil had used this skill to help him successfully catch the start of every single upwards trending market in the last 50 years. As you can imagine, I was impressed. 

The rules that I learned are pretty simple and I follow them every day. After my daily analysis, if the price and volume action of the market and stocks tells me the market is healthy, it means I invest. However if the price and volume action tells me the market’s health has deteriorated, it tells me not to invest as it carries too much risk. I try not to listen to the opinions or theories of others and instead stick to the facts.

Eight hundred pound gorilla investors

Did you know that institutional investors control approximately 75% of the stock market’s future direction.  That’s a really important thing to know and is very useful in helping you to understand how the market really works. This means that when institutional investors are buying or selling, you can see their level of buying or selling activity by simply looking at the level of price and volume activity.  

Each day I watch price and volume action of the four main US stock market indexes and the market's leading stocks. Analyzing price and volume action using stock charts helps me track the buying and selling activity of these institutional investors. In other words, I want to see what the big players are doing with their money and trade with their money flow not against it.

In case you weren’t aware, institutional investors are the eight hundred pound gorilla investors such as banks, building societies and other financial institutions. This includes pension fund managers, hedge fund managers and insurance company fund managers. Institutional investors buy companies such as Apple, Google or Microsoft in huge amounts. In other words, they buy and sell millions of shares. This means that institutional investors are not your small investor. 

Timing the market

Becoming skilled at understanding price and volume action could help increase your accuracy of timing your buys, however it’s important to understand that it’s extremely difficult to time getting out at the very top of the market or getting in right at the very bottom.

If we use an elevator analogy, when a bear market (down market) ends and new bull market (up market) begins, it’s impossible to get into the elevator at the ground floor. Instead, you aim to get in at floor one or two. This is because you have to see clear evidence of institutional investor involvement before committing. By adopting this approach you take out the guesswork and lower the risk of getting your timing wrong.

This principle works for the end of a bull market cycle too. After two to four years a bull market has normally run its course and that’s when a new bear market starts. Trying to catch the top of the market is also impossible. Sticking with the elevator principle, I aim to exit a bull market on floor eight or nine.

Over time and with lots of practice, understanding price and volume action could help you catch the start of bull markets and spot market tops, so you can capitalise on opportunities and move into cash when a downtrend is triggered.

Heavy selling from institutional investors is bad for the market

When institutional investors are selling heavy, meaning volume of trade is greater than average, it's not going to be good for the markets health. In other words, institutional selling weakens the market. It’s like a woodcutter taking a cut out of a tree. By chopping at the tree, it makes it weaker making it more likely to fall.

When institutional investors sell, I become more defensive. When I see a lot of institutional selling in a short period of time, it can often force me out of the market and into the safe harbour of cash.

On the flip side when I see the market rise on heavy volume, it means I’m seeing institutional buying. When institutional investors buy, it strengthens the market and makes it prone to future rises. If you see a lot of institutional buying in a short space of time, it tells you that the people who control about 75% of the markets future direction are going all in.

The right time to buy

Smart investors know that the optimum time to buy is at the beginning of a new bull market, but how do you do this? You watch the price and volume action every day and when you believe a new bull market has begun you aim to accurately move into the market by buying a quality investment fund.

After a bull market has run its course, which is about two to four years, a bear market begins. This is when I aim to quickly move out of the market and into the safety of a cash park. I park temporarily in cash and then sit and wait patiently for a new bull market to start. Bear markets are not as long and last between nine and eighteen months. The boom (bull market) and bust (bear market) cycle repeats throughout time. It’s always happened in the past this way and it will continue to happen like this in the future.

What to do when a bull market has been confirmed

I immediately search for a quality investment fund as soon as price and volume action tells me that a new bull market has started. Once I’ve bought a fund or funds, I stay invested as long as I’m outperforming the market. I also want to ensure that the market and leading stock's price and volume action is positive. Outperforming the market simply means doing better than what the market is returning and my market benchmark to beat is the Nasdaq Composite, arguably one of the strongest indexes in the world.

Beating the market is the Holy Grail for many investors and can seem like an impossible task. However it is possible if you are serious about learning the science of price and volume behaviour and have a real passion for investing.

Please note past performance should not be used as a guide to future performance, which is not guaranteed. Investing in the Funds should be considered a long-term investment. The value of the investment can go down as well as up and there is no guarantee that you will get back the amount you originally invested.


ISACO was established in 2001 by brothers Stephen and Paul Sutherland and is the first financially regulated firm to offer adventurous ISA and SIPP investors a unique personal investment service that shares on a daily basis our star-performing investor’s thoughts, personal insights and investment decisions.

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Topics: Better performance, Investment strategy