October 30th 2007
How I use Trading Volume
If you need a technical definition of volume, you can find one here.
Volume, for me, is conviction. Volume ,placed in context with price movement, allows me to trade effectively. To measure the significance of volume, we need a baseline. I use a 30 day SMA of volume. What I am looking for is the % change relative to the 30 day SMA. My logic here is that 30 trading days of volume data should give me an idea of what is considered “normal” for a given stock.
There are 6 price and volume combinations that I look for:
1. Price goes up, volume goes up.
This is indicative of a greater demand for the stock than supply. The greater the volume relative to the 30 day average, the greater the demand for the stock.
2. Price goes up, volume goes down.
Price would indicate that there is greater demand than supply for a stock, but volume does not confirm the move. I interpret this as just a lack of any real selling pressure with just enough buying pressure to make the price move up.
3. Price goes down, volume goes up.
Like situation 1, but instead we have a glut of sellers. There’s an increased supply of the stock because sellers are flooding the market with shares.
4. Price goes down, volume goes down.
The inverse of number 2. The selling pressure as abated, but there is little , or at least, not enough buying pressure.
5. Price goes sideways, volume goes up.
Depending on the pattern that is formed, the type of action can mean a couple of things. In the case of a Hammer, the stock may be signaling a change in trend. In the case of spinning top-like pattern, you’re probably seeing churn.
6. Price goes sideways, volume goes down.
Lack of conviction either way. When price is a NR7 or NR4, this can be indicative of a pending move.
One final word on volume. Most of the methods I employ are based on extremes. Volume is no exception. I want to see a 50% or more change in volume on the patterns I trade. Hammers should bounce of a spike in volume. The same is true for Marubozu.
Volume is an edge. Don’t ignore it.
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15 Comments »
thewild1 on 30 Oct 2007 at 3:14 pm #
great post.. i also look at volume when analyzing a chart pretty much the same exact way
Jonathan on 01 Nov 2007 at 7:11 pm #
Glad you liked my post wild. Thanks for stopping by again!
Options Trading Beginner on 02 Nov 2007 at 3:02 am #
Great post!
Thanks for sharing it, Jonathan.
Regards,
Options Trading Beginner
David Bradley on 02 Nov 2007 at 5:02 pm #
I agree. If you can properly interpret price and volume moves, other technical indicators are useless by comparison.
Blain Reinkensmeyer on 05 Nov 2007 at 8:55 am #
Solid post, simple yet meaningful, volume is one of my favorite indicators.
61st Festival of Stocks, November 5th 2007 - Stock Trading To Go on 05 Nov 2007 at 9:14 am #
[...] presents How I use Trading Volume posted at A Trade A Day, saying, “This is my strategy for applying trading volume to stock [...]
Jonathan on 05 Nov 2007 at 5:59 pm #
@OTB Glad you liked it!
@David Absolutely, it’s my prime indicator
@Blain Simple is one of my core trading tenants. Thanks for accepting this post for the festival of stocks.
M Trader on 07 Nov 2007 at 9:55 am #
Hi Jonathan,
Great post! I know more about volume now after reading this post. Thanks!
Do drop by my blog for my trading journal if you free.
http://optionstradingdaybook.blogspot.com/
IFN Trading Idea | A Trade A Day on 13 Nov 2007 at 2:14 am #
[...] is another session or two of consolidation and then a breakdown through the 50 SMA on heavy volume. Next stop is 200 SMA with a pause at 50. At least that’s how it plays in my plan. I would [...]
Swinging for the Fences | A Trade A Day on 14 Nov 2007 at 12:17 am #
[...] a couple indications that this trade was suspect. 1. The break down from the bear flag was on low volume. 2. Price moved back into the flag formation.(The best trades move and never look [...]
venkatesan on 16 Nov 2007 at 5:19 am #
hi,
Thanx for ur posting about volume. i’m using volume indicator for day trading if u have any specific method to identify the volume pls tellme.
Love Triangle | A Trade A Day on 03 Jan 2008 at 12:02 am #
[...] Breakout volume needs to surge. 50 to 100% or more. The more the [...]
Love Triangle | A Trade A Day on 03 Jan 2008 at 12:02 am #
[...] Breakout volume needs to surge. 50 to 100% or more. The more the [...]
Everything's a Flag | A Trade A Day on 31 Jan 2008 at 12:02 am #
[...] 1. Declining Volume. Like other consolidation patterns. A downtrend in volume inside the flag pattern is good characteristic. This seems to be one of those rules we all hear and nod our heads thoughtfully…”oh yes, declining volume, quite right”. But why is it important? The easiest way to wrap your mind around this one is to think in terms of supply and demand. When demand is high and supply is low, price moves up. When demand is low and supply is high, price moves down. What about when: [...]
sunil on 17 Oct 2009 at 10:53 am #
in earlier days when i was trading with indicators and other tools i was wasting a lot of time for result. it changed immediately when candles patter i added for idea of momentum. after that when i added volume with it whole scenario and perception changed so much that i am astonished with results i am getting with any stock known to me or not doesnt matter. even in intraday with 10 min charts i am using 7ema on volume. if volume crosses it something definitely will going to happen that is a surity now for me. you can also check the same. there will be no surprise element. for short term trading for days i scan the stocks which have more volumes then yesterday and 7 ema it is crossing. within 4 days you can see what happen to your stock.