Using Stock Trade Volume to Help Investing Decisions
When you pull up a stock quote on your iPhone, Yahoo! Finance, or your broker’s platform, the detailed quote always shows volume along with trade price, day high, day low, etc. So, obviously volume is important, but how is it important and how do good traders and investors make investment decisions with the volume information?
People often focus on price alone. For newer traders, they immediately add a bunch of technical analysis indicators to their stock charts. Again, when you compare technical indicators, most are based on price, so you’re not adding any significant information to your decisions. Even good traders who glance at volume as an indicator only notice it on big news days when there’s a lot of volume. Or, look for it at the end of a selloff to signify capitulation. Not many developing traders learn the right way to read what a stock’s trading volume implies both by itself and in the context of the previous days and week’s volume. And also, putting that into the bigger picture of what exactly the stock price has done.
Technical trader Francis Hunt, aka The Market Sniper, specializes in high probability break out trades. For these types of trades, he uses his detailed understanding of trading volume to increase the odds of his break out trade setups. As he says, volume by itself isn’t a directional indicator. It won’t tell you if price is going up or down. However, volume can confirm and amplify the signficance of a stock’s move. In his lesson explaining how to correctly analyze volume on a chart, he shows the different scenarios of how volume plays a role and what that says about the stock’s move.
Technical analysis of volume will show you different things at the beginning of a stock’s move in a break out, in a trend, and in a range. Knowing this can give you an edge. Higher odds that makes trading a calculated business, not gambling. For example, many traders who use technical analysis don’t believe you can know which way a stock will break out of a range. They wait for a stock to break out of the range before they make a decision, but often that’s being late to the party. For Francis Hunt, using some of the volume analysis he discussed in his Hunt Volatility Funnel strategy, he is able to increase the odds of which way to bet on the break out, or as he calls it, giving you a high probability breakout trade.
Another analysis method of focusing on volume analysis is Volume Profiles, which has been gaining popularity. This method uses historgrams of volume traded at each price, and graphs it horizontally on stock charts rather than vertically based on volume traded each time period. However, Volume Profiles uses a somewhat warped view at stock charts that is foreign to most people, so we won’t discuss it here. If you are interested, Volume Profile has become synonymous with James Dalton’s book Mind Over Markets. Mind over Markets is a great book for any investor to have in their library because it discusses the markets in general, not just Volume Profiles.
By: Jeffrey Lin
