Using Stock Volume
To Spot Huge Moves
and Danger Signs
Stock volume is another very important indicator in investing or trading. It is such an important tool in your arsenal that you should pay attention to it everyday.
When you master how to interpret stock volume, you will be able to spot great opportunities. At the same time, volume can also show you when a stock might reverse direction.
Before, I show you how you can use volume analysis to your advantage, let me explain what volume is. Volume simply means the amount of shares that a traded in a certain period of time.
For example, when you look at a daily stock chart you might see 500,000 on the volume. What that means is that 500,000 shares were traded that day.
Why do professionals always look at stock volume?
Professionals always look at volume because volume shows that there is a lot of activity going on in a particular stock. When there is a lot of activity, it may signal that something is going on in that stock. It may be good or bad...
Here is how you can use stock volume to improve your investing and trading...
Volume should increase in the direction of the trend
A strong volume signifies that there is a strong conviction. Low volume signifies that there is lack of conviction. Picture this, there is a new restaurant in town. The owner of the restaurant says that it's food is the best. Well, the owner can say anything. but what do people think?
If there is a lot of people visiting it, it means people like the food there. On the other hand, if just a few people visit it everyday. You might start to question whether the owner's statement is true or not.
The stock market is the same thing. If the trend is going up and up but volume is not increasing....
It probably means that the uptrend is not that strong after all. Who knows, maybe the market may start to go down by next month.
- When a stock is in an uptrend and the volume is rising, the uptrend is strong. If the volume is decreasing while the stock is in an uptrend, you might want to be more careful. The uptrend may be weakening and a possible reversal might occur.
- When a stock is in a downtrend and the volume is rising, the downtrend is strong. If the volume is decreasing while the stock is in a downtrend, the downtrend may be weakening and a possible reversal might occur.
You might find this a bit confusing. Read it again and again till you get it. It will be worth your effort to understand this concept. Trust me, it will save you lots of money.
How volume can help to spot danger
As discussed in the previous paragraph, volume should increase in the direction of the trend. When you see that the price is moving up while the volume is droping, it flashes a warning sign.
Take a look at the chart above.
In October the SPY was rising, however, the volume decreased. Subsequently the SPY dropped. Similarly in December, the SPY rallied. However, the volume did not confirm the uptrend. Subsequently, the SPY dropped.
Thus, volume can be used to warn that a price move is not to be trusted.
Volume can be used to confirm price movements
Take a look again at the above chart. Notice the blue arrows? Well the SPY was in a downtrend and volume was rising. Therefore, volume was confirming the downtrend.
When you see that the volume is increasing in a downtrend, you do not want to be bottom fishing. It might not be a good time to enter the stock because the price might drop further.
However, there is a right time where increasing stock volume in an uptrend or downtrend signals a buying opportunity. We call that climactic volume setups...
Click here to return from Stock Volume to Basic Page
Click here to return to Home Page