Could an Understanding of Volume Improve Your Trading Results?

By J R Weinger

There are various skills and strategies you’ll need to learn as you progress in the world of trading, if you want to make a significant income and a solid profit. The more you understand about the different kinds of trading you can use, and how your marketplace works, the more confident you’ll feel every time you complete a purchase or sale. One of the most valuable factors you can look at when you’re trying to figure out where you should be spending your hard-earned money, is volume.

The word volume in this context refers to how much of a specific asset has moved in a specific period of time through purchases and sales. For options and futures, the term refers to how contracts change hands. In stocks this word refers to the number of shares moving back and forth at any given time.

How Volume Helps You Trade

So why would volume make a huge difference to your chances of earning a decent income? Simply put, knowing how to assess volume patterns over time will give you an insight into the conviction of certain declines and advances in entire markets. You can use this information to establish whether it’s likely that a share or asset will continue to grow in value, or decrease going forward.

Many people rely heavily on volume in one aspect of decision-making called technical analysis. This when you use the price and volume movements of an asset to determine where opportunities lie for purchasing and selling. This information can be an indicator of market strength, as increasing volume often indicates a healthy asset. On the other hand, when prices fall and volume increase at the same time, most experts agree that the trend is beginning to switch. When prices increase to new highs on decreasing volume, this may indicate that a reversal is about to begin.

Keeping an Eye on Volumes

Through technical analysis and a careful evaluation of the market, experts can check out this video for using relative volume to predict home run trades. Rising markets should generally indicate rising volume, and enthusiasm will generally push prices higher. If price is increasing and volume is decreasing, this usually suggests that interest is decreasing, which often means that a drop is on the horizon.

It is important to remember that although volume can be a good indicator of strength or weakness, there are various factors that can impact which way you approach the market. For instance, in a market that is either falling or rising, you might also notice something called exhaustion moves. This usually refers to a sharp movement in price and volume at the same time. Such a move can signal a possible and to a trend. Participants who are afraid of missing out might pile on their purchases at higher prices, which exhausts the number of buyers. Learning how to improve your income through volume means not only knowing how to look at volume trends, but understanding how to evaluate them in the context of the other information available about an asset.

 

The views and opinions expressed in this commentary are those of the author and do not necessarily reflect the official position of Citizens Journal


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