IMPROVING TRADING BY USING VOLUME
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The analysis of Volume is a basic yet very important element of technical analysis. Volume provides clues as to the intensity of a given price move.
Financial asset has been traded in a given period of time is measured by volume.
Volume can help determine the health of an existing trend. A up-trend should have higher volume on the upward legs of the trend, and lower volume on the downward legs. A downtrend usually has higher volume on the downward legs of the trend and lower volume on the upward legs.
SHORT SCAN ON VOLUME
Volume increases every time a buyer and seller trading their stock or futures contract. If a buyer buys one share of stock from a seller, then that one share is added to the total volume of that particular stock. Volume has two major components.
1. When prices rise or fall, an increase in volume acts as confirmation that the rise or fall in price is real and that the price movement had strength.
2. When prices rise or fall and there is a decrease in volume, then this might be interpreted as being a weak price move, because the price move had very little strength and interest from traders.
A rising market should see rising volume. Buyers require increasing numbers and increasing enthusiasm in order to keep pushing prices higher. Increasing price and decreasing volume show lack of interest and this is a warning of a potential reversal. This can be hard to wrap your mind around, but the simple fact is that a price drop on little volume is not a strong signal. A price drop on large volume is a stronger signal that something in the stock has fundamentally changed.
GUIDELINES TO USE VOLUME
Guidelines to determine strength or weakness of a move by analyzing volume are that the traders are more inclined to join strong moves and take no part in moves that show weakness or may even watch for an entry in the opposite direction of a weak move. These guidelines do not hold true in all situations, but they are a good general aid in trading decisions. These are generally sharp moves in price combined with a sharp increase in volume, which signal the potential end of a trend.
Decrease in volume after the uptrend in these situations, as how volume continues to play out over the next days, weeks and months can be analyzed using the other volume guidelines.
These volume spikes can also be an opportunity for a trader to take a counter move position. One need to know if we are going to trade volume spikes. The action is swift and trader have to keep stops tight, but if the time it right, it can capture some nice gains.
The strategies discussed can be used with any stock and on any time frame. The most important point to remember is trader want to see volume expand in the direction of the trade. The simple way of determining where to focus your attention is on the longest volume bar.
Volume can however provide you further insights into the internal health of a trend.
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