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As you might have noticed, it’s been some time since I have contributed. I have just simply been very busy, including stints of intraday trading when the market was so volatile that I was not prepared to have positions open overnight.  That sort of trading was very profitable but also very demanding. Now that I have some time to write, let’s start with a question I was asked recently.

One of the members of my trading club asked me about the significance of volume.  He had noticed that BHP was down in price last Friday (26 June 09) and that the volume for the day was above average.  He decided to sell just before market close since he was concerned that under the circumstances the following might be true:

“My reckoning was if strong volume doesn’t push the price higher by end of day then sellers are dumping their stock in anticipation of lower prices.  Either the above is true or the smart money has bought up in readiness for the next rally.”

The chart lower down tells the story of the day.

The price opened at the price of the day before, $34.52, and at some time during the day rose to be up by 24 cents but finished the day by giving up most of the gain of the day before.   The daily candle however does not by any means tell the whole story and to get a true picture of what really happened it would help to know if the small rise in price took place with large volume and the lower price at the finish with lower volume or vice versa.  This might give a better picture of what the market sentiment really was on the day.

Notice also that BHP is in a strong uptrend and the trend line you see on the chart touches the lows of the trend repeatedly when viewed over a longer time frame.  I would be more interested in the price action with regard to the trend line than what the volume for the day was.

 

Now going back to the volume, it might be interesting to notice that the volume over the last few weeks has been higher than average as shown by the moving average of the volume.  Before June it was somewhere around the 12 million mark but lately it has been 20 million while on Friday it was over 29 million.  Does it mean anything?   Well it might be that investors are getting back some confidence that things are getting better but that is not borne out by the fact that after getting to $38 the price has been in a steady decline till now it is back to the bottom of the upward channel. 

One thing that’s striking is that large volatile candle that first penetrated the $38 price barrier.  It was accompanied by very high volume of over 36 million and set the stage for the decline that soon followed.  Now this might indicate that people were eager to get into the stock as prices rose so they would not miss out on the action.  Volume dropped off after that and we have to realise that once all those keen buyers were satisfied the buying pressure drops and prices retreat again. That’s something volume and price can suggest.

Looking back over the chart and noticing days when the price goes down on heavy volume (like last Friday) shows that some of these occasions are followed by rising prices and there are days when the same thing is followed by falling prices.  If you really want to see if it means anything I would suggest that you study lots of charts and see what happens after days like that. Note the number of times one thing happens and the number of times the opposite happens and then draw whatever conclusion this might lead to.  Find out what happens most often and that will point you to the most probable outcome for future events.

Doing this will be of much greater value than listening to someone else who gives you an opinion.  Don’t take any pronouncement from anyone as being the ultimate authority since the market is a fluid thing and nobody has all the answers.  If you are a very short term trader it is worthwhile to trade just a few stocks and find out all you can about their behaviour by studying charts and getting to know them intimately.

By the way, what is the “smart money” mentioned in the question I quoted at the beginning?  The institutions and fund managers?  They are just as likely to be selling their best performers at the moment to rebalance their portfolios before the end of the financial year.  That means selling the stocks that are doing well (since their increase in price has made them too large a portion of the portfolio) and keeping the ones that are not. Is that smart?

I don’t usually take too much notice of volume but sometimes it can tell you a great deal.  That’s when I do take notice and I’ll tell you about that next time.

Now before I finish, here is something that might amuse you and also sound familiar.

There are times when it seems the ‘market’ is watching you and having a joke at your expense.  Last week there was a sell signal on one of the stocks that has made me a lot of money recently.  The chart of Paladin (PDN) shows a very nice uptrend but there comes a time when it is necessary to get out.  I got that signal and decided to sell at $4.60.  Guess where that was on the 5 minute intraday chart:

 

Yes, you got that right, it was seconds before that wonderful set of candles that took it almost up to $5.  It cost me several thousands of $$$.  There’s no point getting upset about such things, they just happen.  You might also notice the big increase in volume as the price rose sharply.  The next day the price dropped a lot so that increase in volume and price did not seem to mean too much.

READ NOW: Why volume is an important clue for traders – part 2

 

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Disclaimer: Any information contained in this article is for illustrative purposes only and is not intended as general or personal advice.