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I often hear/read technical analysts looking at volume and price action on a chart and claiming that there are "more buyers than sellers" or vice versa.

Since every trade requires a buyer and a seller, how can volume/price signify more of one than the other? What does that actually mean?

When I hear that there are "more buyers," I get the impression they actually mean more "professional" or "institutional" buyers, but I could just be imagining that meaning.

But wouldn't this "more buyers" situation actually represent a smaller number of large buyers placing multiple orders? (and those orders would be matched by a larger number of smaller investors on the other side of the trade?) Maybe I have my assumptions backwards and "more buyers" is what they say when they actually mean "more retail buyers and less institutional buyers"?

Or maybe the expression has nothing to do with number of buyers/sellers at all and is just some arbitrary technical analysis situation? What situation is it that they're trying to describe?

If the "smart money" traders had placed larger orders, then there would have to be equally large sellers on the other side of that large trade, right? I know trades often get broken up, but if the trades had been broken up it would be equivalent to "large traders placing multiple orders" scenario described above. If the trades were not broken up, then there would not be an imbalance in the "number" of "smart" vs. retail buyers/sellers, right?

UPDATE/EDIT: I usually see this stated in reference to technical indicators such as RSI. I don't typically hear people saying "there are more buyers than sellers" in the situations you guys are describing with more unfilled orders on one side of the (potential) trade (though that would make more sense if that was what they were talking about).

See for example: http://www.wisestockbuyer.com/relative-strength-index/

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You are right for every trade to take place there has to be a buyer and a seller, so essentially on the trade the number of buyers and sellers would be the same.

However, what one means when there are more buyers than sellers is that the quantity of buy orders is more than the quantity of sell orders. This indicates that more people want to buy a particular share and few people are ready to sell. Let's see for an example share XYZ:

 Buy Quantity / Price   ||  Sell Qty / Price  
 20 / 5.30              ||     15 / 5.35  
 15 / 5.25              ||     10 / 5.40  
 25 / 5.20              ||     10 / 5.45  
 40 / 5.15              ||     10 / 5.50  

Given these orders, there will be no trade; i.e. the maximum a buyer is ready to pay is 5.30 and the lowest the seller is ready to sell at is 5.35.

However if you look at total order quantity, there's around 100 to buy compared to 45 to sell, meaning that quite a few are interested in XYZ stock and the chances are high that some may sooner or later be more willing to pay 5.35 or 5.40. However, if it was the other way around, with more sells than buys, it means more people are ready to sell and the price may move down.

There are various other analysis and insights that are derived from the order book and not just the actual trades that took place.

Edit:
The quote from the link you have posted "In other words, if the stock is going up (i.e. more buyers than sellers) then it’s right to buy shares, and similarly if the stock is going down, then it’s right to sell shares. But if this were true, then stock prices would never change direction, and trends never reverse."

The first part "more buyer than sellers" is exactly what I described. The more the buyers, the stock will go up and vice versa.

The article further tries to define an analysis as to when the trend would change ... ie in simple words, based on my example, if there are more buyers, then the price would go up ... at this new price levels there maybe more seller's willing to sell and less buyers willing to buy ... and hence price would start going down. The article gives a analytical way to predicting the turn around, but like all tools there is not fool proof way to predict and there are quite a few occassions when it would go wrong.

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  • +1 Well put! That is why when there are alot of buy orders and few sell orders the price can rise very fast, and vise versa when there are many sell orders and few buy orders then prices can fall very quickly. – Victor Sep 18 '12 at 10:13
  • You cannot calculate the number of orders based on price/volume action. I don't think your answer is correct. – Brian Oct 13 '12 at 10:45
  • What about when buyers versus sellers is somehow gleaned from up-tick/down-tick volume? – Michael Jan 20 '15 at 23:32
  • @Brian His answer is correct. You can see the number of current orders there are outstanding, both to buy and sell. This is not completed orders, which as you say would be 1:1 - this is pending orders. – Grade 'Eh' Bacon Sep 1 '16 at 14:16
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    @Brian The reason for that relationship is as simple as supply vs demand. More demand ['buyers'] raises price. More supply ['sellers'] lowers price. – Grade 'Eh' Bacon Sep 9 '16 at 12:33
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This is related to the bid and the ask. There is usually a spread between them, so the buyers want to buy at $9.95 and the sellers want to sell at $10.05

The two can both sit there indefinitely or someone can place a new limit order hoping to get matched by a seller.

But you can do analysis on placed orders looking at if orders got filled on the buy or ask side. If there are more buyers than sellers than orders will get filled more on the ask side, as the buyers would be willing to accept the sellers price at market.

If I recall correctly, this information is available per order.

In a large market buy order, once the nearest seller gets filled, the next seller (with an even higher price) gets filled, and so on.

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  • I'm talking about situations where people are looking at actual trades that happened, indicators with price/volume, not a look at outstanding un-filled orders. – Brian Oct 13 '12 at 10:46
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RSI and other momentum indicators like Stocastic and MACD, are traditionally used to indicate, as you say, the over sold and over bought conditions.

Investopedia says

Oversold is a condition in which the price of an underlying asset has fallen sharply, and to a level below where its true value resides.

I find this a bit unhelpful, since the stock market is a community of buyers and sellers who agree on a price for an item. The agreed price will be dependent upon the individual seller and buyer's perception of what the value of the asset is.

The true value of an asset is likely to be different to the perceived value of the asset.

I don't find the above definition helpful, as I think if one was to take them it face value and in isolation, then one could get into trouble in real trades.

If you consider the chart below of BHP_AX, with a weekly 5 period RSI

BHP_AX Oversold example

Looking at May 2015 to Sep 2015, the stock was sometimes oversold (<30% RSI), some people mistakenly suggest that the crossing the 50% RSI in mid Oct 2015 was a buy signal, but as the chart later shows, it wasn't, with the stock price dropping from AUD23 to AUD15.

It is possible that the price drop of BHP was due to lower demand for resources in China, whoose economy was contracting at the time, so perhaps instead of being oversold, it was actually a re-valuation?

I think that the oversold and overbought labels are perhaps convenient labels that over time have given people a sense of common understanding which is helpful in describing a stock price action, but not in deciding a trading action.

I might suggest an additional nuance on oversold, that at a point in time it shows the market perception that the sellers are stronger than buyers in terms of price and volume. Just because the RSI of a stock price is less than 30%, doesn't mean it wont stay at that level or drop further, with a similar relationship to price. The converse of course applies to overbought.

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I often hear/read technical analysts looking at volume and price action on a chart and claiming that there are "more buyers than sellers" or vice versa. Since every trade requires a buyer and a seller, how can volume/price signify more of one than the other? What does that actually mean?

"More buyers than sellers" is an inaccurate description that has found its way into common usage. The market is an auction and net excess volume moves price, not the number of buyers or sellers.

For example, XYZ is has a current price of $50.00 x $50.10 with a size of 8x4. That means that one to eight buyers are offering to buy a total 800 shares at $50.00 and one to four buyers are offering to sell 400 shares at $50.10 . Note that 4 buyers of 100 shares at $50.10 has the same effect as one buyer of 400 shares at $50.10 so it's not the number of buyers and sellers but it's the amount buying volume versus selling volume that moves price.

If buyer(s) take out the 400 available shares at the ask price of $50.10 and no one else comes in with an offer to sell shares at $50.10 then the ask price shifts up to the next ask price in the order book. If it's at $50.20 for 200 shares then the quote becomes $50.00 x $50.20 with a size of 8x2.

Now if there's a new buyer for 500 shares willing to pay 5 cents more, then the quote becomes $50.05 x $50.20 with a size of 5x2.

Throughout the day, if a similar amount of buying and selling volume comes in at current price, there is equilibrium and price goes nowhere. If there is an excess of buying volume and it takes out current asks, price rises. Conversely, if there is an excess of selling volume and it takes out current bids, price drops.

As for the Welles Wilder's RSI, it's an improvement on Rate of Change and Stochastics indicators because it removes the “take away” effect of early data. Because it is a ratio, it eliminates the problem of needing large amounts of historical data but because a ratio is used in its calculation, it is more volatile and erratic.

Shorter RSI periods result in a larger number of whipsaws. Longer RSI periods result in more reliable signals but they're not as profitable because of delayed entry and exit..

Don't get too caught up in believing that such signals are accurate. Anything that is overbought can become far more overbought and anything that is oversold can become far more oversold. If you want to verify this, back test a number of sets of data. It might cure you of using them :->)

The short answer is such technical analysis indicators can provide information like support and resistance, trend, and current momentum but they are a just reflection of past price and/or volume movement and they predict absolutely nothing going forward. It's like looking in the rear view mirror to see where you have been.

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