swing trading

Use Volume to Improve Your Trading

| Swing Alpha on 7 Mar 2017 12:00 AM

Volume is a very different indicator from most. It has to be combined with price and other indicators to have any real meaning. It doesn’t work very well by itself.

And yet, for traders that already have a useful trading system, volume can be the key to having that extra edge that allows them to turn small profits into large ones.

So here is an explanation of how to use volume to be a better trader.

What is volume?

By definition, volume is simply the number of times a stock has been traded in a time period. So if you see 0.8m on the hourly volume chart for AAPL, it means that Apple’s shares have been bought/sold 10 million times.

Volume is usually shown as a series of bars.

Here is an example:

What volume means.

When a stock is in an uptrend, it often shows a spike in volume as it approaches short-term peaks. But when it has a pullback, it usually does so on lower volume. This is confirmation that the uptrend is strong and will continue.

The same is true of downtrends. A falling stock price has higher volume as it moves down but lower volume when it rises. Again, this is a sign that the downtrend is strong and intact.

However, when the price reaches a new high during an uptrend or new low during a downtrend and yet has lower volume, this is a warning sign that the trend is losing momentum and may be about to reverse.

An even more ominous sign is when you see an increase in volume in the opposite of the primary trend.  For example, if the price is an uptrend but then suddenly there is a spike in volume as the price goes down, this is a strong sign of a reversal.

Volume can’t be used by itself the way that many indicators can. But it’s still very useful as way to get an added edge in trading. Follow these guidelines to make it work for you.

3 Mar 2017 4:38 PM | Anonymous

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