I’m about to go out for a while, but I thought I’d leave you with a quick thought. Maybe everyone knows this, and maybe not. It’s conventional wisdom that you want to see low-volume pullbacks on trends. They are safer to jump into. Do you know why? If not, think about and make a guess before reading on. Or don’t; I don’t really care. I just like to say that stuff because it makes me sound more educational.

Ready? Let’s take an uptrend, for our example. So, you start with move up in the stock price. There are two ways this can happen (I’m oversimplifying): strong buyers, or weak sellers. You want the up move to be on high volume, because that indicates that it’s likely that you have strong buyers.

Now, the pullback. The stock price is moving down (or at least, not moving up anymore). There are two ways this can happen: strong sellers or weak buyers. Low volume during the pullback makes it more likely that you have weak buyers. And, when you think about it, that’s the preferable option if you hope that the trend will resume. This is also why you want the pullback to be relatively shallow: you want the buyers to be resting… not absent!

An “ideal” uptrend has surges of buying pressure with rests in between, and no big surges of selling pressure. In fact, books on chart patterns sometimes say that a prolonged increase in volume often indicates the end of an uptrend. I imagine one reason could be that sellers step up and eat through the remaining buyers, causing a glut of volume at the top. Another reason would be if the volume surge corresponded to a parabolic move up, which is unsustainable in most cases. Yet another reason would be that a glut of volume means a lot of people are holding shares, and the market always tries to screw over as many people as possible.

Think of that last reason for a minute, and realize why increasing volume does not point to the end of a down trend as reliably as it indicates the end of an uptrend. A prolonged increase in volume means a lot of people are long the stock. For the market to screw over the most people, it would need to continue dropping a bit longer, and then snap back up on lower volume.

So, there. I think it helps me a lot to have an understanding of what might be going on “inside” the chart. I prefer to think I’m trading real market phenomena, and not just chart patterns.