Lesson #3 – Volume is King
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Subscriber, Lesson #3 – Volume is King
Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 Normal false EN-AU MicrosoftInternetExplorer4 Volume is simply the number of shares that trade over a given period of time. The greater the volume, the more active a security is. When analyzing a stock, volume is second
in importance only to price. Volume is an important aspect of technical analysis it is used to confirm trends and chart patterns. The greater the volume in any price move, the more conviction the movement has.
For example, when a stock is breaking out through resistance, and the volume is relatively light, we can not be certain that this is a true breakout. Just because there are a lack of sellers at the point the stock is breaking out, doesn’t imply there is any more demand (buyers) for the stock. Therefore the stock may not continue higher, and could easily reverse its move.
TIP: When a stock
breaks out on big volume, the first dip will normally be bought up very quickly. The same is true for a stock that is selling off. Stocks falling on light volume could simply indicate a "rotation" or "dip", in which many cases, it will be bought at a certain point. However stocks selling off with large corresponding volume usually indicates there is a supply and demand imbalance and the sell off may be longer lived.
TIP: Buying a stock that is selling off aggressively is often we refer to this as "catching a falling knife". This can be extremely dangerous and is only recommended for experienced traders and investors.
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