Value in Time – Better Trading through Effective Volume : [PDF Download]

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“The second way to measure the supply/demand equilibrium is dynamic, but is used only by players with access to large enough funds. It is how you experimentally measure volume volatility. This dynamic method is equivalent to market testing, and costs money to execute.

Some market makers will indeed quickly push the price down and measure how fast a new supply of shares comes into the market or see if the new low price attracts many new buyers. This measure is often executed by trying to move through a support line.

If the support line holds, this indicates that the market is ready for a new up leg. This is a well-known testing method. A significant price decline that attracts fewer sellers than an equivalent recent price decline indicates that the supply of shares is drying up.

As you may notice, these two methods (either static or dynamic) only measure one part of the supply/demand equilibrium: the supply side. The supply side is indeed easier to measure, since we have access to the past transactions.

As we know how many shares have been bought at what price, we can draw some conclusions as to how many could eventually be sold at the current price. This is what I call the supply analysis.”

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