Investing With Volume Analysis: Identify, Follow, and Profit from Trends

reviewed by Mike Carr, CMT

Recognized with the Dow Award for his 2006 paper on volume, Buff is already a recognized expert on the subject. In that paper, he introduced the Volume Confirmation Price Indicator (VCPI). With this book, he furthers not only his reputation as probably the foremost expert on the subject but he also demonstrates that he is a talented story teller as he makes the history of technical analysis come alive for readers.

If we are perfectly honest, at least in my opinion, too many technical analysis books devote their first few chapters to the basics of technical analysis with a few comments on its historical perspective. I usually barely skim these sections because I’ve already read the story several dozen times and wonder why it needs to be repeated. Buff tells it differently, starting in the beginning with examples from Biblical times and moving forward through time to draw on Wyckoff and Schabacker rather than simply the standard facts about Edwards and Magee. He offers a story from Ralph Acampora about how John Magee faced an SEC inquiry where he was forced to defend the principles of technical analysis. While there are few true historians in the field, Buff joins their ranks with his very readable Part 1. Later in the book he references other important but lesser known technicians like Harold Gartley.

Academic research often supports technical analysis but is often overlooked as a reference. Buff provides a complete review of the literature, again in a readable manner eliminating the jargon found in the papers but retaining the main points. His objective seems to be in making the research accessible and explaining practical ways to employ the research.

Volume analysis begins with a basic framework to define the process. Trading volume reflects changes in the supply and demand of stocks. Sellers create supply and buyers provide demand. This simple concept drives stocks prices – more sellers than buyers will lead to lower prices and vice versa. Obviously there is much more to be learned than that, but by explaining the basic idea, Buff ensures a common starting point for novices and experts to comprehend the details that follow.

Behavioral finance theories factor into the explanations of why volume leads price. Technical analysts can appreciate that fact, but many only care about whether or not an idea makes money in the long run. A number of money-making tools are introduced in the book, including volume-weighted moving averages, volume-weighted MACD, and the Trend Thrust Indicator. Practical applications of these are developed, with the underlying logic and strategy explained. Traditional volume indicators are also included, making this a comprehensive review of volume analysis and is the only source needed to gain expertise on the topic. Not surprisingly, the book expands on the VPCI.

Test results are shown for many of the indicators, and the testing is very well designed. That is also different than what is commonly seen in technical analysis books where testing is often overlooked and many times the promised results can’t be obtained. Buff shows what has happened, and does so in a way that inspires confidence that the indicators will work in the future.

Technicians look for ideas they can use to make money. The goal is actually difficult to quantify since risk is such an important consideration relative to returns. Academic treatises tend to rely on measures such as the Sharpe ratio and other mathematically derived concepts of risk. While these numbers have an important role in the literature, Buff boils test results down to what’s important in the real world. For example, when testing volume-weighted moving averages, he uses a simplemoving average system as a baseline for comparison and then evaluates how the new idea compares with respect to”

• Responsiveness: are signals more timely?
• Reliability: are signals more accurate?
• Risk: is drawdown, a trader’s measure of risk, reduced?
• Return: are dollar gains bigger with the new indicator compared to the baseline?

Improved and well-defined testing parameters are most likely an unitended benefit derived from the book. Buff set out to demonstrate how volume should be incorporated into the technicians’ toolbox. However, the testing regimen demonstrated in support of that premise can be adapted to any work in the field.

This book can be enjoyed as a quick read, or studied as one would use a textbook. Ideas are fully presented and explained, but so many of them could be explored further and each chapter could become the basis of research and testing for technicians. The VCPI turns out to have been only a starting point for volume analysis, and hopefully Buff will continue his research into the application of volume into trading strategies. By writing Investing With Volume Analysis, he provides the knowledge for others to advance that research with him, and create the technical tools for the next generation of technicians.