Friday, 10 December 2010

Bursa Malaysia: Importance of Interpreting Volume Bars

Bursa Malaysia: Importance of Interpreting Volume Bars

Author: Lee TG | Publish date: Fri, 10 Dec 16:20

All the chart tools and technical indicators are derived from price. Most technical traders often overlook the importance of volume in the chart, not knowing the significance of interpreting volume bars.

There are two ways we can look at volume:
1. the relative volume, that is, the volume in relation to the previous bar or bars.
2. The actual volume, that is, the size of volume an individual bar represents.

Activities of smart money are shown not only in the price actions, but also in the volume. During the day of high volume, there is a big amount of professional activities shown in the volume histogram (possibly as much as 90%). When there is high volume up bars with wide spread, then it is possible that the professionals are selling.

Personally I will be wary of high volume and big price bars, and prefer not to participate, while many traders may be tempted to ride the uptrend, and often prompted by news and tips. I would think it is better to avoid entry, letting go of the perceived gains rather than risking possible actual losses. But most traders would get excited to chase the stocks when they see high volume price spike with a wide range bar. It is a general rule that strength comes in on high volume down-bars and weakness comes in on high volume up-bars. It is likely that professionals are selling into up bars so as not to be hurt by their own selling. When there is small volume, it merely means that there is no activity by the professionals, and all trading activities are by retail investors.

No comments: