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tmbaru

Importance of Volume to Traders

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INTRODUCTION

In technical analysis, there are several items that are significant and worthy considering, key among the items of concern are the price of a security and volume. In technical and fundamental analysis, the price is taken to encompass all the information available in the market. Volume on the other hand is also a key factor of analytical interest that has to be considered. While grossly misinterpreted, volume refers to the number of securities or contracts traded within a particular duration it could be daily, weekly or even monthly. The volume is directly proportional to the activity of the security; the higher the volume the more active the security. Chart analysts make use of volume bars to establish volume movement. These bars indicate the number of shares traded within a particular period range.

 

THE SIGNIFICANCE OF VOLUME

 

Volume shows the strength or weakness of a trend

Volume in technical analysis is considered shoulder to shoulder with price. It is used to determine how weak or strong a price movement is. If prices go up or down as they normally do accompanied by a large volume moved, such price movements are considered strong and the reverse holds true. Take for instance the price of a security increasing by 7% after being on a bearish trend. This could be easily mistaken for a trend reversal. Technical analysts however before making any conclusion usually study the accompanying volume. If large volumes were moved during the same period then it could be a strong sign of a trend reversal.

 

Therefore the correlation between volume and prices is of paramount importance in determining the characteristics of a trend. A weak trend is seen where price movement is accompanied by a deterioration of volume. Where the volume and price movement are negatively correlated, it’s a sign of a divergence. A simple case of a divergence occurs where prices are moving upwards and volume is declining.

 

Chart pattern determination

Volume can also be used to determine chart patterns. The critical part of chart patterns is the pivotal points. There are several chart patterns such as triangles, flags, head and shoulders et cetera that volume can confirm. The quality of the signal that price patterns communicate to the chartists and technical analysts is considered weak if volume is not there to confirm the pivotal movements of the pattern.

 

Volume as a price predictor

Volume is a predictor of price. In technical analysis, volume movement is closely monitored as it gives a hint as to whether a price run is almost coming to an end or it just has begun. Volume enables chartists for instance to determine whether an upward trend in price movement is about to end by looking at whether such an upward run is accompanied by a decreasing or increasing volume traded.

 

Volume as a tool to gauging market emotions

Volume can also signify the market emotions. Market indecisiveness is typically identified by a high volatility and an insignificant change in security prices. If within a day prices charge up then come lower past the opening then maybe close at the day at the same price it opened, such a price pattern formed is called the Doji candlestick pattern. Now such a pattern is usually accompanied by a weak volume traded. The overall conclusion that can be made out of all this is that the market participants are indecisive accompanied by fear and greed.

 

Volume thus plays a fundamental role in trading. Technical analysts using the volume moved can form different market opinions and forecasts. These form the basis upon which they hinge their trades and take different trading positions. A total disregard to volume is tantamount to blind trading which has been mostly associated with either amateurs or emotional traders. It is also advisable that as part of market analysis, volume should be one of the items that is prioritized reason being that it can easily show the direction of the market. In fact it is often said that show me the volume and I will tell you pointblank whether the business you are in is worth your pennies. Volume is thus so strategic to a trader the same way arrows and spears are to the hunter.

volume.jpg.6e9593f366c573a1f6aab4d398dd5a7b.jpg

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good luck mr tumbari convincing people on this forum about volume. they act as if it doesn't exist. some almost hate volume it seems.:helloooo:

 

ps it also appears many don't like guns. very few of them like me (if any). that isn't new though. i don't like them either. :haha: :haha:

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We can agree on that part

Great,sounds like a licence to print money

Some hunters insist on their right to bear guns.

oh no mr tumbari mitt is here. you are done for. see mitt does not believe in volume. he may hunt down threads that have that word volume in it. he is kinda of like a bounty hunter for volume. dead or alive he is bringing in or down, volume.. :(

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