Today’s Trading Lesson From TradingMarkets
Editor’s Note:
Each night we highlight a lesson from TM University. I hope you learn and profit from them.
Brice
In
this lesson, I will show you how to use the setups we provide in the
Insights From The War Room, combined with volume, to spot profitable
setups in all time frames. The laws of economics dictate that an increase in
demand happening at a time when supply either holds steady or dwindles, will
result in an increase in price. Conversely, when supply of a stock increases
while demand stays the same or tails off, the price will decline. By
successfully identifying along with a chart pattern, an idea of the supply and
demand for a particular issue, a trader can profit. At TradersWire, we
are on the lookout every day for volume clues to alert our subscribers to the
best setups.
Analyzing
Volume
Our team of analysts (all of
whom are experienced traders) when analyzing volume, utilize the following
concepts when picking out the best potential setups:
An increase in volume will
often occur on a price breakout of a formation or pattern. When a large increase
in volume happens in conjunction with the breakout, it gives greater credence to
the signal. (This is most important to the intermediate-term trader)When a price moves does occur
on small volume, many times it is the result of diminishing supply, while the
demand for the stock is present. It also signals that the overall trend is
suspect and only being propped up by the lack of selling rather than the
presence of enthusiastic buyers. (Only tradable by the short-term and swing
trader)In an uptrending stock, the
daily volume should increase and remain higher on average during the
uptrend.In a downtrending stock,
volume is often less than average on many trading days.Volume many times will
decrease during consolidations such as triangles or pennants, and during
pullbacks.When volume increases during
price declines it indicates the path of least resistance for the stock usually
to the downside.
A recent example of how we
look for volume clues is Ballard Power. On July 7 we posted:
color=#770000>11:53:38
 Ballard Power (href=”https://tradingmarkets.com.site/stocks/quotes/goto~www.tradingmarkets.com~redirect.cfm?symbol=BLDP”
target=_top>BLDP) off the href=”https://tradingmarkets.com.site/stocks/indicators/up/cuph.cfm”>Cup and
Handles List, has staged a breakout above its handle on 150% average
volume. BLDP is now trading up 10 5/16 at 104 9/16, so the significance of
the breakout cannot be ignored. Now traders will be looking for follow through
to occur over the upcoming sessions. BLDP currently has a href=”https://tradingmarkets.com.site/stocks/indicators/tools/searchpanel4.cfm?show=1″>3-month
relative strength rating of 83 from TradingMarkets.com.
src=”https://tradingmarkets.com/media/images/Duke/BLDP722.GIF” width=532
border=0>Â
Intermediate-term players who
saw the earlier volume spike were ready for the July 7 breakout. Average daily
volume has also increased during its recent uptrend from the bottom of its cup,
a good sign for the continuation of the trend.Â
Volume
Behavior In Upside Breakouts
An increase in a stock’s
volume serves as an alarm to alert the significance of the power of a breakout
from a price pattern or formation. The larger the increase in volume, the
greater the potential price increase. A price move to the upside on large volume
emphasizes that the stock is coming under great demand and buyers are snapping
up all they can get their hands on. The sharper the move up in tandem with large
volume denotes urgent want for a particular equity. Intermediate-term traders
usually always look for this type of behavior before taking on a
position.
 Micron Technology (href=”https://tradingmarkets.com.site/stocks/quotes/goto~www.tradingmarkets.com~redirect.cfm?symbol=MU”
target=_top>MU) is thrusting well into breakout territory, which is
significant considering how poorly it closed on Wednesday. Volume is looking
good as it is already 80% of its daily average. Some traders may be watching
this setup closely. MU is up 3 3/8 at 73 5/16 and has a href=”https://tradingmarkets.com.site/stocks/indicators/tools/searchpanel4.cfm?show=1″>TradingMarkets.com
3-month RS ranking of 96.
src=”https://tradingmarkets.com/media/images/Duke/MU722.gif” width=542
border=0>
Micron Technology’s (href=”goto~www.tradingmarkets.com~redirect.cfm?symbol=MU”>MU) June 1
breakout shows exactly what heavy accumulation looks like. In a three-week
stretch in April there were 11 days close to 200% average volume or
greater — and it did not slow after the breakout. Postition traders were
rewarded with a more than 20% gain over the next two months.
src=”https://tradingmarkets.com/media/images/Duke/NVDA722.gif” width=542
border=0>
Short-term traders can also
benefit from learning to read volume on the tape as well. NVIDIA (href=”goto~www.tradingmarkets.com~redirect.cfm?symbol=NVDA”>NVDA) the week
of June 12-16 appeared on TradersWire’s “Uptrending Stocks In
Consolidation” List. Average daily volume for NVDA is around 850,000 shares, but
had been close to 2 million per day over the sessions leading up to the June 19
pop from the consolidation. Short-term traders who could see what was brewing
beneath the surface locked in a nice gain for a two-day trade.
However, not all increases in
price action are accompanied by large increases in volume. This can occur when
the demand to buy the stock may be there, but not a great deal of sellers are
present. This upward price action accompanied by lower volume can many times
indicate that many of the stocks’ purchasers are content to hold onto their
shares at this point and the supply is lessened. A spike up in the price of a
stock coupled with very small volume can often indicate to the trader that the
rising prices are nearing a climax and the uptrend is in danger of collapse.
This is only of tradable interest to the short-term and swing trader, who with
this knowledge may be able to take advantage of an upward price move in these
circumstances. Since the short-term and swing trader’s time frame is short he
can ride out the remaining rise in prices, protecting capital with the use of
tight, diligent stops. The intermediate or longer term trader who learns to spot
this activity can either lock in their profit or avoid getting whacked when the
reversal hits by not exposing their account to a new position at this
juncture.Â
Volume
Activity in Downside Moves
Just as one likes to see
volume rise in an uptrend and upon breaking out from a consolidation,
short-sellers wishing to take on a position in the hopes of capturing a big
downside gain begin licking their chops when they see volume expanding as prices
go into free fall. In a healthy, bullish market price and volume shrink in
unison, due in most part to a shortage of buyers rather than an abundance of
sellers. However, when prices slip lower as volume grows, it alerts extreme
downward pressure is evident and sellers are anxious and/or panicking. This is a
good omen for those entering short positions when this type of price/volume
action shows up.
src=”https://tradingmarkets.com/media/images/Duke/2RHAT722.gif” width=542
border=0>
Red Hat (href=”goto~www.tradingmarkets.com~redirect.cfm?symbol=RHAT”>RHAT) appeared
on the TradersWire March 28 as a Plunge Alert, with a special note
of the heavier volume. Short-sellers noted that this spike in volume was being
incurred during RHAT’s downtrend. With that knowledge, they were aware of the
heavy downward pressure from overhead and took a short position when Red Hat
followed through even lower the next day. They could then ride the waterfall
down for a good-sized gain over the month of April and into May as selling
continued on higher than average volume.
In conclusion, when adding
volume analysis to your trader’s toolbox, keep this guideline in
mind:
Normal price/volume action is
for both to rise concurrently and to fall at the same time in healthy markets.
When other instances occur, they signal abnormalities in that market, and any
position, no matter what the time frame, must be evaluated and either exited or
adhere to strict stops and protect capital if a reversal
occurs.Â
Prices move because of the
relationship between buyers and sellers. If those wanting to buy are more
motivated than the sellers, the price goes up. When the number of sellers
outnumber the amount of purchasers, the opposite is true and prices go lower. By
learning to interpret volume activity along with dynamic TradersWire
setups, you can increase the number of trades in which you are on the
winning side.