While many investors these days are familiar with charts in a general sense, too few pay attention to one key aspect of stock charts—volume. Trading volume represents the total number of stock shares, bonds, or commodities futures contracts traded during a certain period of time.
The simplest use of volume is just to confirm advances and declines. When a stock is making good progress in price terms, it’s good to see that volume is also up. It confirms that lots of buyers want in. Similarly, when a stock is declining, a parallel increase in selling volume lets you know that sellers are in control. Just using these two inputs, you should be able to identify good buy and sell points.
When you see a stock stage either (a) a huge gap up on big volume on meaningful news (often earnings), or (b) many days in a row of heavy buying that takes the stock to new highs, that “volume area” will often provide support during the next few weeks. And that means dips into that area represent low-risk buy points.
Big volume clues that coincide with meaningful moves in a liquid stock are invaluable—they often point to a new uptrend getting underway, or the end of a prior move. These huge moves are caused by institutional investors … and once institutions start buying or selling, they rarely stop in just a couple of weeks.
One word of advice: Stocks with low trading volume (and low prices, as well) can be very volatile, often enticing you with rip-roaring advances that make your mouth water. But beware! If a stock is trading fewer than 300,000 shares a day, you may have difficulty executing a trade in a timely manner, which could mean buying higher (or selling lower) than you meant to.
To learn more, download our FREE report, Technical Analysis of Stocks: How Relative Performance Works, Why Trading Volume is Important, and Other Chart-Reading Lessons.
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