Why Jesse Livermore thought the "Volume Factor" was so important to value a stock's trend

From the beginning of his trading career, Livermore was keenly aware of the importance of volume. Volume is a key factor in recognizing true Pivotal Points and other recurring patterns. It was obvious to Livermore that as the volume drastically changed in a stock, it was a clear aberration or deviation from the normal behavior of the stock. He would ask himself—was it the volume leading to the blow off, setting the stage for a decline, or was it a real interest in the stock, was it being accumulated getting ready to be driven higher?

Livermore never spent any time looking for the reason why the stock was attracting a lot of volume. He simply took it as an axiom that volume was an alert signal. He knew that the actual reasons why would be revealed later when the chance to make money was gone.

Conversely, if there is heavy volume, but the prices stall and do not go up and make new highs, and there is no strong continuation of the current move, beware. This is often a strong clue, a warning, that the stock may have topped out and the accumulation is over and the stock is now going through a distribution phase.

The end of a market move is usually pure distribution, as stocks go from strong hands into weak hands, from the professionals to the public, from accumulation to distribution. It is often a market move by the promoters of the stock, a deception, to trick the public, who view this heavy volume as the mark of a vibrant, healthy market going through a normal correction, not a top or a bottom.

Livermore was always on the alert for volume indications as key signals at the end of a major move, either in the entire market itself or in an individual stock. Also, he observed that at the end of a long move, it was not uncommon for stocks to suddenly spike up in a straight shot with heavy volume and then stop and roll at the top, exhausted. Then they would retreat, downward—never to make a new high before the onslaught of a major correction.

Many technical traders place little importance on volume—not so with Jesse Livermore. The study of volume was a key element to be carefully analyzed at critical moments of a stock’s life and history.