What You Can Learn From a Stock’s Trading Volume | Technical Analysis Course


Buying and selling
the same stocks as institutional
traders, there’s one way to try to increase
in trading success. While identifying trends can
help you find these stocks, sometimes it helps to
look at volume, too. Volume is the number of shares
traded on a particular day and can provide further
evidence of institutional buying or selling. Let’s look at how to
combine trend and volume. Also, I’ll show you a tool
in PaperMoney, the On Balance Volume Indicator or OBV. First, let’s look at
a bullish example, where volume increased
during an uptrend. For this example, we’ll
look at a one-year daily bar chart of amazon.com. The volume is in the pane
on the bottom of the chart. Each column represents a day. In January 2015, Amazon made a
positive earnings announcement. The good news caused
an influx of demand, resulting in many buy orders. This is reflected in a
volume spike and a price gap. Gaps happen when price makes a
big move since the last price with no trading in between. In this case, the
price gapped up to find enough supply
to fill the demand. Price continued to rally,
resulting in a new high. Eventually buying slowed
and the stock pulled back. Volume returned to normal and
price created a new higher low. The stock created new
higher highs and higher lows through July. Throughout the trend,
notice how a volume spike accompanied each rally. Increased volume on the
rally suggests institutions are buying the stock. Let’s see what happens to
volume in a bearish example. Suncorp Energy Inc. Created
lower highs and lower lows from June to August of 2014. Now let’s look at volume. If you compare the summer
months to the fall months, you see volume picked up
through September and October. To show what was happening to
price, I’ll draw a trend line. This increased selling caused
the stock to fall more quickly. As we move forward, we can see
that similar selling took place in November and December. The higher volume and
the faster price selloff likely shows where more
institutions started selling. This is another example of
how combining volume and price can help you see
where institutions are putting their money. When it comes to
analyzing volume, there are a couple of
things to keep in mind. First, downtrends are
commonly faster than uptrends. In fact, it’s been said that
stocks take the stairs going up and the window going down. You saw this in the
previous example. Therefore, you
should consider ways to protect your investments. Second, sometimes
high volume stocks don’t show large volume spikes. This makes it difficult
to tell where institutions may be putting their money. A stock like Apple trades
63 million shares per day. Compare that to Amazon’s
four million shares per day. To cause a spike in Apple,
a lot of institutions would need to be
trading the stock. The spike will still happen,
but just not as often. However, there are charting
indicators like the OBV to help you spot volume
strength with the trend. It measures the
volume on up and down days to see where the
trend strength is. First, also you have
to add the indicator. Then we’ll talk
through how it works. For this example,
let’s use Alphabet. I’ll type G-O-O-G-L in the
search field and hit Enter. Now I’ll add the OBV by clicking
the Edit Studies button. Next, I’ll scroll down to On
Balance Volume and select it. Now I’ll click Add Selected. OBV works best if it’s
visually overlapping price because it helps you identify
the trend and its strength. By placing them side by side,
you have an easy comparison. So I’m going to move the
study over the price. This is done by placing the
mouse over the On Balance Volume pane and clicking
the up arrow until it’s in the price pane like this. Finally, I’ll click OK. Here’s what to consider. When volume is
confirming an uptrend, the OBV line will uptrend at
a greater rate than the stock price. When volume is
confirming a downtrend, the OBV line will downtrend at
a greater rate than the price. Alphabet traded sideways
for much of 2014 and 2015. When we look at the
volume pane, there is hardly any
discernible difference in the volume for
Alphabet in 2015. However, we can see
that in January of 2015, the OBV uptrended faster
than the stock price. This signaled that
institutions were likely accumulating shares. For traders using this
tool, the July breakout may not have been a surprise. Uptrends identify
stocks and demand. Combining trend with volume
provides more evidence when attempting to identify
which stocks institutions may be buying.

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