Can A Stock Go The Distance? Volume Offers Clues
When it comes to analyzing a stock chart, price action is king.
However, volume is a like a thoughtfully placed castle or knight or queen that can help you win a game of chess.
When your game of chess is the stock market, those who succeed stack the odds in their favor.
- Volume is a tool that can help you do that.
Many technical indicators
are simply "price" - sliced and diced via a complex formula and then delivered in colored lines on or below your price chart.
Why should you care?
Volume is in a completely different category. It's a complementary tool that can be used to analyze the significance of a price move.
we use technical analysis to help find great stocks to trade. It's a starting point to identify low-risk, income-producing option trades. Plus, it's just fun looking at charts too.
What is volume?
Let's start with the basics.
- Volume is the measure of the number of shares of Apple or Tesla or Facebook traded during a day.
You can also view volume on an intraday basis, or a longer-term view, weekly or monthly volume data can be called up just as easily.
How does it help?
Volume can be extremely useful to measure the amount of participation in a stock, the psychology of traders and confirmation of the trend
Here's a quick look at some of the most active stocks last week (those with the biggest volume).
- Bank of America (BAC) 41,454,740
- General Electric (GE) 27,828,267
- AT&T (T) 26,315,899
- Verizon Communications (VZ) 21,383,734
- Pfizer (PFE) 19,564,042
Volume is also a way to screen for stocks and help identify markets that may be scoring big breakouts or significant trend moves, when you are looking for stocks to trade.
How to Apply Volume: Thank Sir Isaac Newton
In case you slept through high school physics, Newton's first law of motion reflects the concept underlying volume analysis in the stock market.
- Newton's first law says that an object in motion will stay in motion unless acted upon by an unbalanced force.
You could simply say that volume is the fuel behind a stock's move.
Volume: How full is the tank?
Is the gas tank full?
This provides powerful momentum for your Ford Mustang speeding down California's incredibly scenic Highway 1 on a sunny, cloudless day with the ocean sparkling bright. The road is clear, the music is on, there's not a care in the world.
Or, is the gas tank near empty?
Your engine is starting to sputter and you are forced to pull off to the shoulder of the road.
If you looking to initiate a new stock position, it's important to know how much gas is in the tank!
After all, you don't want to start a long road trip (or stock trade) with only one gallon of gas left in the tank.
Use volume to confirm a trend
A strong and healthy stock uptrend typically reveals bigger volume on up days and smaller volume on down days. The opposite is true for a downtrend.
Bulls and bears
These are generalities, but worth keeping in the back of your mind.
Watch for divergence: a red flag warning signal
- Bull markets tend to have bigger volume
- While bear markets tend to have lighter volume.
- That means, in a downtrend, you would look for increasing volume on down days and decreasing volume on up days.
Divergence is the opposite of confirmation. If a stock price is rising and hits a new 52-week high on weak volume, it may be time to take some profits.
Blow-off and climax moves
No, I'm not trying to excite you. These truly are technical terms. Seriously.
Blow-offs tend to occur at major market peaks, while climaxes emerge at market bottoms. These terms refer to a massive amount of volume, which emerges late in a market rally (or decline), with a sudden peak. Prices then abruptly reverse.
I believe everyone has the right to create financial security and additional income for themselves. Trading is a way you can do that on your terms, on your time.
If you are an experienced trader or just getting started, I've developed courses that can help you become more profitable. Thousands of traders have read my book: How You Can Trade Like A Pro
, completed my option strategy courses
, and trade with me in my live trading room
. I can help you too. I break it down and make it easy to understand and simple to execute.
Come trade with me today!
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