Indicators  |  JUN 2008

Stocks & Commodities V. 26:6 (26-30) The Overlooked But Profitable Volume by Cory Mitchell

The Overlooked But Profitable Volume by Cory Mitchell It’s ubiquitous, easy to use, and can lead to outstanding results. The number of stock shares that change hands over a given length of time is one of the most significant pieces of information we have. Yet more often than not, the average trader takes that information for granted. Volume is provided, by default, on any website that provides stock data, in newspapers, and on charting websites and software. Volume information can be found almost everywhere, which may be the reason many traders don’t pay as much attention to it as they should. It may be that they feel the information is tedious or since the information is so readily available it couldn’t possibly be a great trading tool. And this, of course, could not be farther from the truth. While the number of shares that change hands in a given stock — the volume — is not a complex algorithm or intricate quantitative indicator, it does provide relevant information that can lead the astute market watcher to outperforming profits. WHAT DOES VOLUME TELL YOU? Volume is the ultimate telltale sign of accumulation or distribution in a stock. If a stock is rising on heavy volume,the stock is being accumulated, meaning buyers are willing to pay a higher price in order to attain or accumulate shares. If a stock is falling on heavy volume, it is being distributed, meaning sellers are willing to get rid of their shares at a lower price just to dispose of them. A stock that is not moving but is stuck in a channel on heavy volume implies buyers and sellers are battling, both with strong convictions. During times like these, the winner is not immediately evident until a breakout occurs (on heavy volume, preferably). By recognizing that most major moves in tradables take place because there is a large accumulation or distribution of shares, the trader can make more informed and higher-profit probability trading decisions. Analyzing volume can be used to aid a trader in entering a position. It may be used as a tool while in a trade to determine if the trade should be kept on or if profits/losses should be taken and the position closed.

by Cory Mitchell, CMT