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The Import of Volume - Technical Indicator Series

Volume is a measure of how much stock or how many contracts (if options) or barrels (if oil) are traded in a given day, week, month or quarter. Changes in volume traded can signal a change in price trend and relative strength either up or down. A marked shift in average daily volume alongside an increasing or decreasing price trend is a signal that should be carefully assessed as part of any trading strategy whether short, mid or long term.

Some volume trends worth noting include:-

  • Strong or healthy rising markets in a stock, index or commodity are typically correlated with an increase in trading volume.
  • Rising volume in a downward trending market can indicate a bearish shift in direction.
  • When market prices reach new highs or lows on decreasing volume this can signal a reversal is in the making. It is also however quite possible that volume can remain weak for extended periods without shifts in trend.
  • Market bottoms or tops can also be signalled by significant volume and decrease or increase in price or they can signal further momentum to the downside or upside
  • A marked shift in volume can indicate a shifting price trend. Institutional investors buy in larger volume and while they try to disguise price action their buying can move price significantly especially in smaller cap stocks.

It is important not to rely on one tool or signal alone but rather use multiple signals to assess changes in trend. Purists who rely only on technical analysis believe that changesin price is the ultimate indicator or truth of a companies or markets prospects as perceived by the majority. Investors who use fundamental analysis do not concern themselves much with technical analysis as they believe if the market fundamentals and management are strong, it will grow as will its profits and inevitably the share price will appreciate. Another subsector of investors will use both fundamental and technical analysis in their decision making.

Popular volume signals and oscillators include the Chaikin Money Flow and Klinger Oscillator.  





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