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I have often wondered why so many times when you chase a market, you end up getting filled at the top, only to see the trend reverse and have prices go down on you. Or, when you chase a short down after the selling is in full gear, you print low tick, and watch as price races up on you. I have wondered why on so many bottoms and tops that you will see a high volume spike as shown on your charts. Many people will tell you that its just because people got stupid and panicked, or that there were more sellers than buyers or vice versa. This is partly true, but its not the whole truth. It doesn't really explain why this phenomena happens as far as I'm concerned. The first thing you always have to keep in mind is that trading is highly competitive and everyone wants to make a buck. Most traders also probably have a higher than average intelligence, so you're not dealing with a bunch of dummies. So let's take an example and look at this more closely. Let us assume that there is stock, "xyz", being held by 10,000 people which has been in a trading range. It is trading in the $40 area. All of these 10,000 people are holding because they believe that the stock will in fact go up and they will make money. If they didn't believe that then they obviously would not be holding on to the stock. Now let's assume that for whatever reason, the news, lower interest rates, etc., causes the stock to break out of its trading range. The reason it breaks out of its range is because there are people who do not own it, but want to own it, and they are willing to start bidding up the price, just like in an auction. Many people will tell you that the price goes up because there are more buyers than sellers. This is not true. Every transaction has a seller and a buyer. The price goes up because at every price increment, there are more "available" buyers than "available" sellers. So once the supply of available sellers at a certain price level falls below the available buyers, the only way a buyer can get the stock is to bid up the price to entice a holder of the stock to sell to him. Do you remember learning in your economics class that price will stabilize when supply equals demand? The same thing holds true for stock.
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