Using Volume for Financial Technical Analysis
I don't know if you've seen this...
All the information you get from the stock market every day in financial technical analysis charts is:
- Volume
- Price
You're right. Every day, the only things that are known are the price and the number of transactions. These are put on charts and used for financial technical analysis. Even though volume is such an important factor, not many technical traders use it to help them decide when to enter and leave a trade. This is because most technical traders don't know how to make sense of the daily volume bars in relation to the price action. Here is a simple chart that shows what the behaviour of price vs. volume means. I hope it helps you understand your financial technical analysis better.
Volume-Based Financial Technical Analysis
Price going up plus sales going up equals a healthy bull trend
Price going up and volume going down means the bull trend is losing steam and will soon hit a ceiling.
Price going down and volume going up equals a healthy bear trend.
Price going down plus volume going down = bear trend drying up, bottoming out soon.
Price drop plus sudden rise in volume equals selling peak; short-term support level reached
Price at its highest point plus a sudden increase in volume = Buying Climax, resistance level reached.
Using volume, a financial technical analysis of the head-and-shoulder formation
A head and shoulders top formation has a very clear pattern of volume.
The volume peaks on the left shoulder. As prices go up to the head, the amount sold goes up.
But this second peak in volume should be lower than the left shoulder peak. With this higher price peak,
yet lower peak in volume, is an important signal to the trader that buying interest is far less ardent.
Last, as prices go up and make the right shoulder, volume goes down even more.
Using Volume for Financial Technical Analysis, Conclusion
I hope that this simple explanation of what each change in price versus volume means in financial technical analysis will help you as a technical trader read your charts more accurately and trade more consistently.
Read more at http://www.mastersoequity.com/MOE startradingsystem.htm about how to use technical analysis in a planned way.
