Let’s accept the fact. Not all of us do our stock analysis well enough. Before every buy/sell, partial analysis creates doubts. Still we proceed with doubts driven by intuition. So, hasty buying takes the place of in-depth analysis. In the days that follow, the result is more stress and even a sell-off at a perfect wrong timing!
Is there a simple indicator that will help you avoid most of your mistakes? Fortunately yes…
Stock chart volume is a forgotten indicator for hasty investors. These small bars at the bottom of a chart mean nothing to them. You will see why volume is a significant predictor of trends.
For those, who never knew.. what is “stock volume”?
A stock volume is a measure of the number of shares traded on a particular day. These are in the form of bars. A taller bar represents lots of shares traded. A shorter bar indicates less number of shares traded. Red colored bar indicates that the price has fallen on a day. a green bar means the price rose.
Regarding volume, what is one simple thing you should never forget?
Any price movement accompanied by low volume is insignificant. Such price movements are short-term and may not benefit anyone (other than super short traders!). The bottom line is: never make a decision on stock price alone. Your eyes should automatically move to check the volume. Now you will see how volume is a good predictor of a trend.
There is no complex calculations or interpretations. All you have to do is this. Remember this one simple rule:
A Reverse In Trend + High Volume = Strong Trend
Now you will see an explanation…
Assume a stock is falling for the past few days. Let a reversal occur and price begins to rise. Now you are in a mood to buy/sell this stock. What should you do now? Have a look at the volume after the trend reversal. If the volume is high and on the rise, the rising trend will most probably continue. The trend is strong!
Is volume a 100% reliable indicator in analysis? Absolutely NO. It is yet another indicator and has an important drawback.
A sharp rise in volume and falling prices may reflect a panic selling due to sentiments. Such panic selling may not truely reflect a company’s fundamentals. Hence, you should use volume with caution and analyze other factors before your decisions.