Use Stock Volume to Your Benefit

So how can you use volume to your advantage?

1.  Remind yourself that traders only determine the short term price not the value.

2.  Use the volume to help predict the right time to buy more assets or change into a better position.

Large volume (relatively speaking) means the price is at a peak or valley.  You are either at the top or the bottom of the chart, you need to determine this.



What is Stock Volume?

Summary
In this lesson, we learned the importance of stock volume. Although volume won’t help intelligent investors learn the intrinsic value of a company, it can be used as a tool to help predict market behaviour.

Many times investors can be fooled into believing that the market price of a stock is determined by all the shareholders. This idea is false.

When we look at the volume of a company on an given day, we can quickly get a sense of how many traders are actually determining the price of a stock when we compare this number to the shares outstanding. This ratio, volume/shares outstanding, provides a good idea how many traders are moving away from the company and how many are coming into the company.

• When the company trades at a very low volume, we can generally say that the shareholder agree with the market price. 
• Likewise, if the volume is very high, we can generally say that shareholders disagree with the market price.

We demonstrated this principal with Wells Fargo (WFC). When we looked at the historical market price for WFC, we learned that on the day where the volume was the highest in ten years, the market price was at an all time low. This idea of shareholders disagreeing with the market price when volume is relatively high is an important point that stock traders can use to their advantage. 

Always remember, volume can mean that the stock is over priced or underpriced. The peak or valley is for you to discern.



http://www.buffettsbooks.com/security-analysis/what-is-stock-volume.html

How to Interpret Volume

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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.


http://www.i3investor.com/jsp/incl/blogdet.jsp?f=11&e=54

Reflections on Volume

Big volume without further upside equals distribution
Big volume without further downside equals accumulation
Volume tends to peak at turning points
Volume often precedes price movement
Volume is a relative study

Dow Theory - Market Phases

Dow Theory - Market Phases

Primary movements have three phases. Look out for these general conditions in the market:

Bull Markets

Bull markets commence with reviving confidence as business conditions improve.
Prices rise as the market responds to improved earnings
Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.

Bear Markets

Bear markets start with abandonment of the hopes and expectations that sustained inflated prices.
Prices decline in response to disappointing earnings.
Distress selling follows as speculators attempt to close out their positions and securities are sold without regard to their true value.

Dividend Yield

Dow believed that stocks yielding below 3.5 percent were over-priced "except there be some special reason." Richard Russell analyzed the dividend yield on the Dow from 1929 to 1959 and found that the market tended to reverse when yields had fallen to between 3 and 4 percent.

Since the 1960s the dividend yield on the Dow and S&P 500 has declined to around 2 percent. We should be careful not to leap to the conclusion that the market is way over-valued. Examine the S&P 500 chart below and you will observe that the Dividend Payout Ratio declined over the same period, from 60 to 30 percent.



Companies are retaining a higher percentage of earnings, preferring to return capital to stockholders by way of share buy-backs rather than by way of dividends. This favors investors who prefer the enhanced earnings growth offered by share buy-backs, without the tax implications associated with dividends.

We should therefore switch our focus to earnings yield, rather than dividend yield, in order to avoid any distortion. An earnings yield of below 5.0 percent would offer a similar over-bought signal to a dividend yield of less than 3.5 percent (0.035/0.7=0.05). This translates to a price-earnings (PE) ratio above 20. I use a PE ratio above 20 to signal that a bull market is entering stage 3.

Perfect Your Market Timing
Learn how to manage your market risk.

Volume Confirmation

Increased volume on declines and dull activity on rallies provide additional evidence of an overbought market. Conversely, lack of activity on declines and increased volume during rallies indicate an oversold market. See Volume Patterns for further detail.

http://www.incrediblecharts.com/technical/dow_theory_market_phases.php

Technical Analysis

Remember: There is no market without price movement,  there is no price movement without volume Remember: Volume - your most powerful ally http://www.index-technical-analysis.com/

When Stock Market Trading Volumes Thin

When Stock Market Trading Volumes Thin

DECEMBER 22, 2009 · 0 COMMENTS

In the days leading up to Christmas, and various other times throughout the year, stock market trading thins considerably. Trading volume levels decrease as stock exchanges close early and many institutions are simply happy to hold onto their positions and wait out the end of the year with their gains.

Lower trading volumes mean less liquidity and therefore higher volatility in prices. Because less shares are moving around, there may not be the requisite number or size of buyers or sellers to complete trades as they come in, and this causes larger discrepancies between bid and ask prices.


Do Lower Trading Volumes Affect the Average Investor?

Because of the general increase in volatility, the main effect that the average investor has to watch out for are the swings in prices. This can cause both increased opportunity for bargains, but you might want to put some stop losses in on your trades as well. Know the levels that you wish to buy and sell at.

When there is more volume, price updates can be more gradual and can spend several minutes if not hours fluctuating between one and two cents in either direction.

It won’t affect your ability to place most trades, however – you just need to keep an eye out on the price swings. For some stocks, you may not even notice a big difference at all.

There is usually another uptick in stock trading in the week following Christmas – then dies down again before the New Year’s weekend before picking back up again in full force in January.

With the lower volume around the Christmas holidays often also comes what many call the Santa Claus rally – upward movements as investors seek to lock in positions before the end of the year. Don’t count on it, though (it didn’t happen in 2008) – because there can be just as much tax-loss selling, too.

Learn the Basics of Stock Options Trading
Outlook for Canadian Stocks in 2010

http://www.getmoneyenergy.com/2009/12/stock-market-trading-volumes-thin/

Average Daily Volume of DJIA over the Decades