Why Volume?
The technical analysis of volume is a basic yet very
important element of market timing strategy. Volume provides clues as to the
intensity of a given price move.
Volume can help determine the health of an existing trend. A healthy
up-trend should have higher volume on the upward legs of the trend, and
lower volume on the downward (corrective) legs. A healthy downtrend usually
has higher volume on the downward legs of the trend and lower volume on the
upward (corrective) legs.
Volume intraday helps see where a stock is being repeatedly bought as it
dips. Likewise, towards the end of a rally, an expanded range bar together
with a spike in volume often signals that the move is at an end, at least
short-term. If you weren't aware of it before, I hope you're starting to see
why volume is a trader's best friend.
A moving average of volume should also be taken into consideration in
developing your Market Timing system. A Moving Average is an indicator that
shows the average value of a security's price over a period of time. This is
important for technical analysis because when the current volume rises above
a long term volume moving average, this is potentially a signal that there
is increased market activity that will be affecting the price. Thus, it is
important to provide this indicator as an input.
Additionally, unlike many indicators, volume is applicable to every
timeframe. How can this be? Simple. Volume is simply a measure of sentiment,
of human nature. And fortunately for us, human nature is the one
ever-present constant of the stock market. Never forget that fact. Once you
have your own emotions under control as a trader, knowledge of this profound
fact will guide you ever after as reliably as the Northern Star guides a
lone sailor across a vast sea. Now you should really be starting to see why
volume is a trader's best friend and .
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