Trading)VPA, Trading Volume: The Only Window for Retail Investors to Peek Inside the Market (Chapter 2)
Volume is the only tool retail traders have to peek inside the market. While price alone doesn’t reveal the true strength of a move, volume helps assess whether a price increase or decrease is sustainable. By analyzing volume, traders can better understand market trends and spot when smart money is entering or leaving, providing a crucial edge in decision-making.
Why Volume?
The chapter opens with a quote from Warren Buffett:
“The key is having more information than the other guy – then analyzing it right and using it rationally.”
To illustrate how markets work, the author shares a fictional story: The Parable of Uncle Joe.
Uncle Joe’s Story
Uncle Joe runs a government-licensed company that is the only supplier of a product called widgets. Though the product has real value and doesn't degrade, business is boring—sales are slow, and profits are small.
To boost sales, Uncle Joe spreads a subtle rumor through a gossiping neighbor: widgets might soon be in short supply. As expected, word spreads, and demand increases. Uncle Joe raises prices, and customers keep buying—some even resell at a profit.
Eventually, Uncle Joe’s stock runs low. Sales volume falls, but he keeps raising prices to maintain the illusion of scarcity. Then, by chance, another rumor helps him again—this time, that a big competitor is entering the market. Uncle Joe pretends it's true, and panic selling begins. People rush to sell their widgets before they supposedly lose all value. Joe buys them back cheaply.
Once the panic fades, he resells his stock slowly at original prices. Business returns to normal. But now, Uncle Joe starts to wonder: Could I do it again?
The Point of the Story
Though fictional, this tale mirrors how market makers operate. Like Uncle Joe, market makers have access to information regular investors don’t—they can see both supply and demand. They're licensed insiders, not subject to the same insider trading laws as ordinary investors. Without them, markets wouldn't function, because they ensure liquidity (your orders get filled).
But this power allows them to influence prices, especially when opportunities arise—like news events, even unrelated ones. If most market makers hold excess inventory and a news story lets them offload it, they may act in unison.
So, while no single market maker controls the entire system, they can collectively shift markets by responding to imbalances in supply and demand.
The Role of Volume
This leads to the chapter’s main idea: Volume is the only tool retail traders have to “peek inside the market.”
While price shows what is happening, volume tells you how strong or weak the move is. If prices rise and volume rises too, it's a strong, valid move. If prices rise on weak volume, it’s likely unsustainable—something’s off.
Volume works across markets:
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Stocks (even manipulated ones): Helps you avoid being tricked by market makers.
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Futures: Helps confirm price trends and spot reversals.
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Forex (Spot Market): No real volume, but we use tick volume as a proxy. Tick volume isn’t perfect, but studies show it reflects about 90% of real market activity.
For instance, right before a big news event like the Non-Farm Payroll (NFP) report, tick charts move slowly. But when the news hits, price changes explode—volume surges. That activity, even measured in tick data, gives insight into real market behavior.
📌 Final Summary
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Market makers have the advantage of seeing the full order book.
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They use it to their advantage—legally.
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We can't see what they see—but volume is our way to detect their actions.
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Volume validates price. It shows us when smart money is entering or leaving.
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It's not perfect, but it's the best tool we’ve got.
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