Dormeier, Investing with Volume Analysis

In addition to his “real” job managing money, Buff Pelz Dormeier develops technical indicators. He shares some of the fruits of his—and his noteworthy predecessors’—labor in Investing with Volume Analysis: Identify, Follow, and Profit from Trends (FT Press, 2011).

When I started reading this book I suspected that it would be like so many others: long on generalities and short on actionable ideas. The first hundred pages or so do indeed deal with general relationships between price and volume, and some of the material is familiar. But even the familiar material is often presented in an unusual way. Here’s one example.

Newton’s second law of motion, reinterpreted to apply to financial markets, analyzes “how much volume (force) is required to move a security (the object) a given distance (price change) at a given speed (acceleration/momentum). … Richard Wyckoff referred to this principle as the law of effort versus result, which asserts that the effort must be in proportion to the results.” (p. 47) As a corollary of this law, “if more volume (force) is required to produce less price change (acceleration), then the stock is becoming overly bought or sold.” (p. 85)

In apparent contradiction to Wyckoff’s law of effort is the rule of trend volume, according to which “more volume substantiates a stronger trend.” (p. 85) Can these two principles be reconciled? Dormeier suggests that they can, once we bring the notions of strong hands and weak hands into the equation. His discussion is too detailed to summarize here, but it is premised on how strong hands and weak hands play the game. As he writes, “Strong hands buy out of an expectation of capital appreciation. Weak hands buy out of greed and the fear of missing out on an opportunity. Weak hands sell from the fear of losing capital. Strong hands sell to reinvest in better opportunities (which does not have to be other equities).” (p. 87)

Dormeier really hits his stride when he turns “general volume principles into indicators with numerical values.” (p. 113) These indicators have a dual mandate—to lead price and to confirm price. But they don’t all work the same way; they are “tools, each of which is designed to explain a distinct piece of the volume puzzle.” (p. 117) (more…)

Eight questions

questions1. Are you willing to face your failures without recrimination?

2. Do you delude yourself with notions and rationalizations that you are limited by the nature of the marketplace or the tape?

3. Are you willing to acknowledge your successes, or are you afraid that others will be disappointed or hurt if you tell them you have succeeded?

4. Do you hold back from succeeding because of some childhood notion about not deserving to win?

5. Do you hold back in your trading because of a reluctance to let it be as good as it can be?

6. Are you held back by imagined restrictions placed on you by other obligations?

7. How much do you distort reality because of fear of the consequences?

8. How willing are you to commit 100 percent to being in the game?

The Market Never Lies, Never Fails

Notions like ‘false breakouts‘ are generally harmful to traders, because they presuppose that the market can try to do something. A move reverses and they say the breakout is ‘false’ or it ‘failed’ or whatever. Reality check…

The market does not fail to do anything. Ever! You were the one that thought it was breaking out and you were wrong. It happens, get over it. And get in the right mindset: you are trying to predict the natural evolution of price, and you won’t always get it right. Getting it right more often is a good idea if you want better returns. Telling the market it was the one that ‘failed’ is just pissing in the wind.

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