TraderPlanet provides a bunch of interesting and informative articles, but the ones that come directly to my email inbox are the best because coming directly to my inbox makes my life easier.
Today, TraderPlanet’s Market Beat popped magically into my inbox and, lo and behold, an interesting article appeared, “Use Volume As A Guide” by Kira McCaffrey Brecht. I enjoy her writing normally, but today I enjoyed it more because she wrote about something I think is underestimated in trading – volume. Her opening paragraph beefs up the importance of volume nicely.
Many technical traders will tell you that price is king. Everything comes down to price, and price is the most important indicator in and of itself. And as many experienced traders know, many technical indicators are simply price massaged, oiled and spit out into a fancy blue or red line at the bottom of one’s chart. But, volume is a completely different animal. While you’d have to travel far and wide before you’d likely find a trader who would say that volume readings are more important than price, they are useful and significant raw data readings, which measure the amount of action and psychology of the market players.
Ms. Brecht is correct – everything comes down to price, eventually; however, it is a mistake to make price the “most important indicator in and of itself.” I understand she is not saying this; she is pointing to the fact that others believe this to be so. I am not one of those.
The importance of price for entering and exiting trades is indisputable; however, the reality around the price is the determining factor for the price, which makes it an effect, not a cause. Many, many factors affect price, and volume is one of the more important.
For example, if news comes out on a stock and the price-action begins to fly, the impetus for the strong movement is volume, the sheer number of people interested in buying or selling the stock. On the other hand, if news comes out on a stock and the price-action is dead, the reason is the people buying and selling are not all that enthused. So, in this case, it is not the news that drives the price action; it is the volume.
I could go on here about the importance of volume as an indicator, but Ms. Brecht does a fine job of defining this in her article. I recommend you read it. I do, however, wish to share one more important thing about volume. Volume directly correlates to liquidity. Thinly trade stocks tend to have jumpy and inconsistent price-action while strongly traded stocks have solid price-action. So, no matter the price, if you cannot get in and get out within the parameters of your trade, you will find it difficult to make money in the long term. Highly liquid stocks (high trading volume) provide the best opportunity to get in at your price and out at your price. So there!
Trade in the day; invest in your life
