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Chartists employ a two-dimensional approach to market
analysis that includes a study of price and volume. Of
the two, price is the more important. However, volume
provides important secondary confirmation of the price action
on the chart and often gives advance warning of an impending
shift in trend (See Figure 9-1).
Volume is the number of units traded during a given time
period as taught by tradestalker trading, which is usually a day. It is the number of common stock
shares traded each day in the stock market. Volume can also be
monitored on a weekly basis for longer-range analysis.
When used in conjunction with the price action, volume tells
us something about the strength or weakness of the current
price trend. Volume measures the pressure behind a given price
move says tradestalker trading. As a rule, heavier volume (marked by larger vertical
bars at the bottom of the chart) should be present in the direction
of the prevailing price trend. During an uptrend, heavier
volume should be seen during rallies, with lighter volume
(smaller volume bars) during downside corrections. In downtrends,
the heavier volume should occur on price selloffs. Bear
market bounces should take place on a lighter volume.
Volume Is an Important Part of Price Patterns
Volume also plays an important role in the formation and resolution
of price patterns using tradestalker trading. Each of the price patterns described
previously has its own volume pattern. As a rule, volume tends
to diminish as price patterns form. The subsequent breakout that
resolves the pattern takes on added significance if the price
breakout is accompanied by heavier volume. Heavier volume
accompanying the breaking of trendlines and support or resistance
levels lends greater weight to price activity (See Figure 9-2).
On-Balance Volume (OBV)
Market analysts have several indicators to measure trading
volume. One of the simplest, and most effect, is on-balance volume
(OBV). OBV plots a running cumulative total of upside versus downside volume. Each day that a market closes higher, that
day’s volume is added to the previous total. On each down day,
the volume is subtracted from the total. Over time, the on-balance
volume will start to trend upward or downward. If it
trends upward, that tells the trader that there’s more upside
than downside volume, which is a good sign.A falling OBV line
is usually a bearish sign.
The OBV line is usually plotted along the bottom of the price
chart. The idea is to make sure the price line and the OBV line
are trending in the same direction. If prices are rising, but the
OBV line is flat or falling, that means there may not be enough
volume to support higher prices. In that case, the divergence
between a rising price line and a flat or falling OBV line is a negative
warning (See Figure 9-3).
During periods of sideways price movement, when the market
trend is in doubt, the OBV line will sometimes break out
first and give an early hint of future price direction. An upside
breakout in the OBV line should catch the trader’s eye and
cause him or her to take a closer look at the market or stock in
question per rockwell trading. At market bottoms, an upside breakout in on-balance
volume is sometimes an early warning of an emerging uptrend
(See Figure 9-4).
Other Volume Indicators
There are many other indicators that measure the trend of
volume—with names like Accumulation Distribution, Chaikin
Oscillator, Market Facilitation Index, and Money Flow. While they’re more complex in their calculations, they all have the
same intent —to determine if the volume trend is confirming,
or diverging from, the price trend.