Stock Market Trading
Technical Analysis of the Volume
Volume always has been an indicator that reveals the health of a trend. The trend of any security is always described by price and volume. The price tells us where the value of the security is and the volume tells us how actively this security is traded. Change in price tells us whether the value of a security is declining or rising and change in volume reveal whether this change is price is based on greedy buying or panic selling.
Technical analysis of the trend of a stock, index or any other security without the volume provides only half of the picture. If the price of a stock reaches a new high, this does not mean that the stock is overbought and, conversely, if a stock's price drops to new lows, it does not imply that the stock is oversold. Only the volume provides the information about intensity of buying and selling during the upward movement and decline. The volume can tell how many shares or contracts were traded during the price advance or decline. Therefore, it provides a clear picture of the money flow - whether the money is coming into a stock, index or market, or the money is being pulled out. Only the volume can indicate how strongly overbought or oversold a stock, index or market is.
When it comes to volume-based technical analysis, as with price, it is not recommended that the analysis be applied to infrequently traded stocks. For instance, if a stock is traded only once or twice a day, a rapid change in this stock's price will confuse all technical indicators and gaps in this stock's volume will confuse volume-based indicators. Since not many traders are interested in low volume stocks (that is why their volume is low), the question of applying volume- and price-based technical analysis to low volume stocks or stocks with low liquidity can be omitted. Still, when there is a need to analyze a low volume stock, a recommendation could be to apply technical analysis to a sector index that covers the industry in which this stocks operates by assuming that the stock's general trend will follow the industry's trend.
The volume-based technical analysis of highly liquid stocks (stocks for which a high volume of shares are traded) provide excellent results. The best results can be achieved from a volume analysis that is applied to the indexes and exchanges. The volume of the NYSE (^NYA), AMEX (^XAX) and NASDAQ (^COMP) exchanges can provide an accurate picture of the U.S. economy. Such a volume of the S&P 500 index (^SPX) can be not only an excellent indicator of the U.S. stock market, but also used to generate profitable signals for trading SPY stock (S&P 500 tracking stock), ES futures (S&P 500 emini) and other securities that track this index. The same can be said for the volume of the Dow Jones Industrials (^DJI) and NASDAQ 100 index (^NDX), which can serve as barometers of the health of the U.S. economy and can be used to trade DIA and QQQ stocks, as well as other securities that track the performance of the DJI and NASDAQ 100 indexes. The volume of the indexes and exchanges are used by a majority of professional investors to analyze the market and trade various securities.
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