I have been thinking about supply and demand. Just using a classic diagram, one can see the following:
Increase in demand: price and quantity traded both rise.
Increase in supply: price falls, quantity rises.
Decrease in demand: price and quantity both fall.
Decrease in supply: price rises, quantity falls.
This must be the thinking behind the “rising volume confirms a move” adage. If volume rises with a falling price, there is a growing number of sellers; if volume rises with a rising price, there is a growing number of buyers.
Can I use these ideas to get a better feel for what is going on in the market? I have made an indicator that looks at the change in price and volume each day and paints the bar as follows:
Increase in demand: bright green.
Increase in supply: bright red.
Decrease in demand: dark green.
Decrease in supply: dark red.
Here is a screenshot for the Dow:
A bit of messing around with different markets has suggested that this could be a useful way of looking at things. In particular, the chart often turns red for a few days before a downward move from the top of a range — which I suppose suggests that the demand curve has stopped moving and the supply curve is starting to shift around as sellers become less keen to hold as the story shifts.
I was annoyed that I couldn’t try this idea out on currency markets. The volume traded is not known, but one can use as a proxy the number of times the price ticks in a day. Oddly, Tradestation does not provide daily tick data — it only gives it intra-day, for example if you are looking at 10-minute bars. I have tried a few times to get around this by adding up all the ticks, and failed. Looking around in an internet forum, I eventually found the simple answer: display 1440-minute bars, so that each bar is a day long. This allows you to see daily tick data.